Good day, and 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, and 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 and Chief Executive Officer we have Brian Byrd, 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 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 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 p. M. Eastern Time today and can be found on our website, again, northwesternenergydot 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, and thank you all for joining us this afternoon. I'll touch on a few significant events, just a couple of comments about our COVID response and then turn it over to Brian to go into detail on financial results. First, net income for the quarter decreased $22,100,000 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 30 to shareholders of record as of June 15. Due to the anticipated impacts from COVID-nineteen related disruptions across our territory, combined with the Q1 results below our expectations, we are lowering 2020 EPS guidance had been $3.45 to $3.60 per share. We're lowering to $3.30 to $3.45 So 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.
We are continuing with our capital programs unchanged, and we have no change to our targeted 6% to 9% PSR. Just a few highlights going into a situation like this. It's a real test of the underlying strength of the company. On Page 4, we highlight some of our history. Many of you know this.
The 3 things I would simply speak to are we have maintained an exceptional safety record before and going into the COVID 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-nineteen response, we, like many companies, have business continuity plans. We have a crisis action structure. We drill, we train, we plan, we prepare.
COVID nineteen 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 11.
That structure has continued to evolve as necessary and has been very effective. Some basic steps that we took, 1st 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 and 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. And 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.
So 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 grade of service that we've been able to maintain is just really, really top notch. I expect you want to talk more about COVID during the discussion. So with that, I will turn it over to Brian to walk through our financial situation. Brian?
Thanks, Bob. On Page 6, from a summary financial results perspective, as Bob pointed out, our net income $50,700,000 or down $22,100,000 or 30 percent for the Q1 is certainly a disappointing quarter. At a high level, when you look at gross margin, down 24.5 and compare that to income before taxes around 25.5. The story for the quarter was very disappointing margin on a year over year basis. In fact, improvement in operating expenses were effectively offset by slightly higher other expense.
And so net net, it was margin as a whole. Moving on to margin on Slide 7. Again, down 24.5% on a year over year basis. And again, dollars 15,000,000 of that, especially with electric and $9,000,000 associated with gas. But the actual decrease in gross margin as a whole associated with volumes, electric down 8.7 $1,000,000 gas down $8,400,000 I mentioned here weather that the change on a year over year basis is $18,000,000 associated with weather.
So obviously a big part of those two line items. The other major contributor to the $22,200,000 change in gross margin and impacts net income are other miscellaneous non recurring items, which are primarily items associated with tracker adjustments. We had a favorable adjustments in 2019 and unfavorable in 2020 for that particular item. But those three things, electric volumes, gas volumes and the nonrecurring items make up the substantial change there. We did see Oasis revenues off primarily associated with closure of Units 12 at Colstrip and gas production continues to come down.
But 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 $2,300,000 decrease for a total again $24,500,000 total decrease in gross margin. Moving on to weather, Page 8. 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 that maps at the bottom of the page, you can see in 2019 is extremely cold in February March, and we are actually quite a bit warmer in February of this year.
So a pretty big swing on a year over year basis. And that warm first quarter contributed approximately $4,000,000 of pretax gross margin detriment as compared to normal and $18,000,000 pretax detriment as compared to the Q1 of 2019. Regarding operating expenses, operating expenses were down 2,700,000 dollars Of those that actually impact OG and 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. So slight change there, dollars 1,800,000 We also had some changes in OG and A that are offset elsewhere in net income.
That's a decrease of $3,900,000 for a net decrease of $2,100,000 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 operating to net income, operating income itself was down $21,800,000 or 22%. Interest expense was up slightly due to higher borrowings. The other expense increase of $3,100,000 is primarily the offsets I just spoke to in OG and A.
And that brought us down to pretax income, I mentioned earlier, down 25,500,000 dollars The benefit that we saw in income taxes excuse me, the $3,400,000 decrease in income taxes of the benefit is primarily due to lower pretax income, partially offset by lower amortization of EBIT and other flow through items. And speaking of income tax items on Page 11 and a reconciliation, you can see our income calculated at the statutory rate, down $5,300,000 that offset by the EBIT I mentioned, the flow through items down below gets us to the $3,400,000 decrease in income tax expenses. And even for the quarter, though, we had a decrease in income taxes. One thing I should point out, because of we had a poor first quarter, and that as a percentage of our total pretax for the year, we actually will book lower tax credits during the quarter. And so that benefit would have been much bigger if in fact we get a similar proportion of our total pretax income this quarter versus 2019, of course, having a very strong quarter and having a higher proportion of the total.
So 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. And lastly, our effective tax rate is expected to reach 10% by 20 23. Regarding the balance sheet, not much to report there, a little change.
Caps of cash on hand is associated with COVID 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 $47,000,000 improvement in cash flow. Really think of it three things. We had better collection of supply costs from our tracker in this Q1 versus last year.
2019, we're giving TCJA credits to our customers. And 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 Q1 of 2019 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 point 0 $6 to get to $1.06 compared to the far right at the bottom, dollars 1.44 reducing that for favorable weather by $0.21 get to $1.23 that $1.06 versus $1.23 is a $0.17 detriment are 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 $18,000,000 change in a year over year basis. Lastly, as I walk down kind of through the P and L itself, gross margins down $6,500,000 after you adjust out weather. And 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 pretax detriment of 7.5 $1,000,000 on a year over year basis.
And then lastly, the reason I've talked about on the tax reconciliation a little bit about the income tax changes here, it actually shows we have an unfavorable on a year over year basis on a non GAAP adjustments. And you can see if you look to the far right in the income tax line, there's a tax expense that when you back out, the favorable weather, you actually got yourself into a favorable tax position on a non GAAP adjusted 2019 from your income taxes. And the reverse that happened here this quarter. We had a favorable income taxes and then offset to a degree by the adjustment from the unfavorable weather and net net income tax became a negative variance as a result on a year over year comparison of 1.1. Total again 8.6 percent 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, we wanted to increase our normal liquidity minimum threshold of $100,000,000 up to $200,000,000 And the best way to do that was to actually enter into a 3.64 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, so we feel very good from a liquidity perspective. One thing on 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 Bob pointed out earlier that we reduced our range, for Bob pointed out earlier that we reduced our range from $3.45 to $3.60 down to $3.30 to 3.45 The primary measures there associated with COVID, of course, and a poor Q1. Regarding COVID, just to think about how we laid out our thought process, we expected a very difficult Q2. Obviously, with business closures and social distancing in place, it's a very tough second quarter, easing significant in the 3rd quarter and nearly fully recovered in the 4th quarter. We also adjusted our tax rate to a negative from previously a negative 2% to a positive 3%, down to a negative 5% to 0%. And lastly, as Bob pointed out, continued investment, think about a long term 6% to 9% total return, TSR, if you will.
Mentioned earlier in previous calls, if we continue to invest over 400,000,000 dollars we expect to be in the midpoint of that range. If you think about 2019 as your base going forward, we still see 6% to 9% as our long term total shareholder return range. Moving on to Slide 17. Hope this was a good depiction of the changes in the guidance. And 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 a $0.15 as you can see. I wanted to give you the flavor of what the changes were. Obviously, a very difficult Q1. You see a $0.09 negative impact from a gross margin perspective and a $0.06 income tax expense. And 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. And I do expect some of that $0.09 up above to be a timing matter as well. So think of the Q1 is 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 Q1 and the other half is really associated with COVID effects for the last three quarters of the year. And speaking of those changes, you can see the ranges there.
From gross margin perspective, you can assume essentially flat minus $0.03 to a positive $0.03 And obviously, COVID is in there, but we also have some timing and some growth expected in there. And so plan that the midpoint of that, of course, is flat. We do increase our expense control during the year as a result of COVID. 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. And 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. And but if you can see how we clawed back $0.27 if you will, subtract $0.08 of incremental OG and A recovery, subtract $0.02 of depreciation improvement and subtract another $0.02 of net change, net improvement in income taxes and you get to a $0.15 change in your guidance as a whole. So 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, dollars 0.15 is really associated that guidance is in part due to Q1 remainder due to COVID 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 3% to 2% plus 3% for that period.
One of the things we would point out, the impact of COVID in 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 eightytwenty rule from a customer count perspective. I think residential customers being 80% of both our electric and gas business, which is true. But 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. So on a combined basis, think kind of the contribution from residential and commercial about fifty-fifty. And you can see very little impact from industrial on the electric side and nearly none on the gas side. So laying that as a precursor just to understand the business a bit better, Upper right is just our overall concept of what we had impact we thought we have on loads. And it's a forecast, folks.
COVID is very difficult to comprehend. But talking to our energy supply folks and thinking how this would play out, we anticipated about a 3:one ratio impact from a volumetric perspective on our business. So that commercial accounts would go down at a rate of down 3 point or 3 down to 3 to our increase of 1 in residential. In essence, for Q2, expect commercial 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 1 is the quarter that gives the least amount of contribution to net income.
But in fairness, Q1 and Q2 combined are about 50% of our contribution. So a difficult Q1 and a difficult second quarter will be difficult to overcome with the last two quarters of the year. But with expense control and expected recovery in the 3rd Q4, we expect to offset a portion of the Q1 that we talked about earlier. Little more granular detail by both electric and gas is shown down below. In the far right, we show the 2020 estimate of COVID versus pre COVID.
You could see the impact on residential and commercial there, and same thing from the gas side. Wanted to give you a lot of information. 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 investors a look into how we're thinking about this. I think the easy answer would have been to just to drop guidance all together.
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. 1st and foremost, it is only impacting our Montana Electric only business. And by the way, it's not even in effect until July of this year. And so due to the recovery that we expect in the 3rd Q4, we didn't expect the coupling to have too much of an impact on the changes here as a whole.
And lastly, I'd remind folks, in Montana, the 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, much more of an impact on the residential side of our business. Moving on to Slide 19, COVID from an expense standpoint. We note at the bottom, we $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. And by the way, this assumes regulatory recovery increased bad debt expense in our jurisdictions. And on that point, and I'd argue that's approximately $0.05 of our thought process here. And why would we expect to have regulatory recovery of increased bad debt expense? We've had discussions with our 2 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. But that is built in into our guidance.
And with that, I know that's 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 $80,000,000 2nd, as we talked about, we are successfully executing against this year's capital plan, even managing supply chain and paying attention to things like that. The work is getting done.
And 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. So we do consider the current level of capital to be sustainable over the coming years. Looking forward, we 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 names 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 related concern 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 moved to implementation. We expect the plant to be online by late 2021.
In Montana, we have the competitive solicitation for 280 Megawatts 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 situation. Meanwhile, and just fundamentally foundationally, our ongoing work in the transmission distribution system to continue to modernize address reliability capacity functionality is going forward. And 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 on the South Dakota.
In 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 Polestrip 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.
So we considered that proposal 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, very good deal. As most of you are aware, Cowen 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. So the unfortunate part of that is that customers are losing some significant value. On the other hand, Talend's action does affirm that we negotiated a very good deal for our customers and also does indicate Collin's longer term interest.
Collin had also asserted a ROFR against our transmission purchase. Our view is that there is no ROFR available for that. I think Allen at least acknowledges our position. We are in the process of refiling or filing an amendment to our an order filing finding that our initial application under the Montana preapproval 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.
And the Montana preapproval statute is quite specific about 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. And 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.
Hi, Ryan.
So the DH rule is in effect.
So 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?
Yes. We do look at rate cases every spring when we look at whether a rate case is appropriate. And 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?
And expectations in terms of rate case filings in 2021?
Right.
No, I think it's too early for that.
Fair enough. And then 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. And 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 has adopted. We're concerned about the substance and about a clear order, much less concerned about a starting date.
Hey, Bob. And just on the phone, it's difficult 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. So just one thing on rate case, I agree with everything Bob said. I just want to add something though on South Dakota. We had 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 immeasurable capital.
So 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. Brian and I have not been in the same room since early March, late February.
Fair enough. And then I guess just looking at the margin assumptions, are you able to give any color on your transmission revenue expectations? And I guess any color you can kind of provide on that $1,200,000 headwind in terms of what might have been COVID related there for the quarter?
Yes. I saw some thoughts about transmission impacted by COVID. We're not seeing that. Certainly, haven't seen it in the Q1. The 2 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 12.
So that was already in effect pre COVID. The other impact we did have in the Q1 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 time period. So another good thing about industrial for us, in Montana for sure, and we don't have a ton of industrial here in South Dakota, not commercial, but not a ton of industrial. So the nice thing though in the state of Montana, most of our industrial customers are in industries deemed important and to continue in production. So we haven't seen a lot of fall off as of late there.
Fair enough. And then just lastly, real quick on the rate case stuff. So I understand your commentary around South Dakota. But in terms of Montana, how should we plan to think about the interrelationship between significant O and 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 and see what we're going to do there.
Fair enough. Appreciate the time, guys.
Thanks, Brian.
And our next question will come from Shahriar Pourreza with Guggenheim Partners.
Hey, good morning, guys or good afternoon, actually. Just a couple of quick questions here. Your outlook
assumes business closures in the Q2 with some sort of a mean reversion with business activity in the Q4. If the outcome is sort of more protracted or the recovery assumptions that you guys have in the slides are lagging by maybe 1 or 2 more quarters, Do you guys have additional levers above the $0.09 in O and 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, Charles, we looked at kind of a worst case scenario, essentially said what if in fact we were in this situation in the Q2 for a full year And our guidance would go down another $0.15 associated with that. So that gives you an idea of the magnitude swing if in fact we were locked down for all of 2020. So 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 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. So we assume effectively lockdown into and through all of the second quarter in our assumptions and so and then recovery. So I think, and again, things can change. We're certainly well aware of that.
And if we're not careful, they can change. And if 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 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. And then just we're 3 weeks into the Q2. 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 2nd, 3rd and Q4 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? Yes.
We don't have great information on customer by customer basis. We don't have EMI throughout in Montana. What we do have though is we're responsible for flow 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 loans 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 percent drop in Lowe's as a whole. So 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. And 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.
But from that low base, we are seeing an unusual trend up this year, obviously, associated with COVID just in payment issues. So we need to work with customers there, and we hope that, again, our regulators will support us in doing that.
Got it. And then just on the CapEx, obviously, it was reiterated, but it does sort of decelerate through your trajectory. And the message has always generally been that you can backfill. Does COVID sort of related slowdowns impact kind of this conservative bend? And 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?
We have because our capital program is not at this point overly dependent on a small number of headline project that's really driven by what are the needs in the system. So there is some flexibility in bringing programs forward and back. I wouldn't think of it so much as backfilling a hole and just doing the work that's appropriate to do and doing that in a sequence that makes sense. So this year in distribution, there were resources available to really focus on line sub segments using data, engineering, GAAP analysis to go in and address reliability issues, be proactive in terms of fire management, things like that. So that's an example of a program that can be moved up depending on available resources.
And Brian, I know you want to chip in on that
one too.
It's been working together a long time, Bob. Yes, I would say this. We have as far as I can recall, we've always invested more in the actual year of that 5th year forecast than we actually have shown 5 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 5th year. But we tend to fill that in, Shar.
So I'd say that first. 2nd, 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 $400,000,000 of investment throughout this whole time period. And again, that gives us comfort being in the midpoint of our 6% to 9% total shareholder return.
And so yes, I do think we'll fill that in. But until we've identified the projects and have done significant amount of work in terms of laying them out, we're not just going to throw projects in there to make it add up to 400.
Got it. Got it. And 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 Q1 and then now you're expecting sometime in the second quarter. Just and obviously highlighted some of that could have been related to COVID. Is there any potential this can go into further slippage? I mean the program I think is supposed to go into effect in the beginning of July. So just get a little bit of a sense on timing if there's a potential to switch 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 the coupling is important and affirming its original decision.
Robert, just not sure, but it may actually be on the work session next week too.
Yes, yes, it is. Now whether they act next week or decide to take action at some point in the future. But 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.
And we'll take our next question from Michael Weinstein with Credit Suisse.
Hey Brian, on Page 7, you have listed other miscellaneous one time items affecting gross margins.
Could you maybe go through
some of those miscellaneous items? Like what are they and why are they onetime?
Well, I think what we've done is we've had some adjustments to trackers. And I think from our perspective, unfortunately, much like margin, the adjustment that we had last year of all of which from our perspective is several adjustments in other and in all cases. But they were favorable in 'nineteen and unfavorable in 'twenty. And just the swing on a year over year basis is larger than usual. So I'll leave it at that, Michael.
But think trackers where those adjustments are typically help.
I think the concern is when people try to analyze it, they look at that. It's a $4,900,000 item and it's being investors are being told to ignore that for next year, right? So is that and going forward,
is that Yes. And 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. PECAM, for instance, was a relatively new thing and 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. So obviously, getting our arms around that. If there are other changes to trackers, for instance, that this could be something that happens again.
But I don't foresee anything in the Q1 of 2021 as I sit here today.
Okay, thanks. So I'll follow-up, I'll sign up about that 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. But from a tax repairs, we continue to do a lot of work. 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.
And bad debt recovery being considered by the regulators in Montana, what about other expenses? Any is there anything else that they might be willing to consider, you think, while they're
I would say, here's the thing about bad debt and then talking to other utilities. Bad debt is 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 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? Thus bad debt is one that I think everybody can get their arms around pretty well.
But we are in dialogue with other utilities and they have some other ideas and so in the 2 jurisdictions that we're talking about. But we do we'd all like to come in with a joint filing. And Mike, one other thing to your question on credits, the main thing I want to reiterate is just the tax rate itself. The negative 5% to 0% is the thing I want to leave you with.
And one last question here. On Colstrip, with Talend taking a piece of it now, if I remember right, you guys, you have a contract with Puget that makes a certain amount of gross margin over 5 years and you're 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 is not more liability to fund, but the profit from CPA back would be diminished, not necessarily one for 1, but that is disappointing. We thought we were doing and still are doing something that is really creative and progressive in identifying a revenue source to prefund closing costs, and we still intend to do that. Unfortunately, it will be at a lower level, And we'll be updating our filing here right away to reflect all of that.
If I
remember right, I think it's about a $25,000,000 profit that you were expecting to get, so something closer maybe $12,000,000 now?
It depends on obviously what's going on at the Mid Sea, but it would still be a significant contribution.
Yes. I think, Michael, I just want to be clear 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 4.
So hopefully that clarifies that.
And we'll take our next question from Chris Ellinghaus with Seyburt Williams.
The guidance doesn't reflect seemingly a whole lot of impact from any kind of second spike in the 4th 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. And 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. And so taking that into consideration.
But in fairness, if things on the ground change, we could be wrong in our assumptions.
Okay. Yes. I was going to say, it sounds like based on your timetable locally that maybe theoretically your thought process on the Q2 could be a little better than you thought, but you're also not reflecting quite as harsh 4th quarter. So you're comfortable with the year as it is kind of?
Yes. I think
on a particular quarter, we might not nail it. I like it thinking about it over the 3 quarters that we'll be in pretty good shape.
Okay. And 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-nineteen? 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. And the health and safety of our employees is number 1. And the steps we've taken so far are designed to ensure that they continue to be healthy. The second factor I mentioned is supply chain and our supply chain team is paying a lot of attention to that and there have been some shifts in inventory.
But so far, we're able to get parts in reasonably good shape. 3rd, we talked about before, there's some ability to adjust plans project to project forward and back. But the big picture, it all seems to come together at this point.
Okay, great. Thanks.
Thanks, operator. Bob, I'd add sorry, Chris, I don't know if you're running 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 that's we're doing less of that, and that's an expense item. And so 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.
And we'll take our next question from Brian Russo with Sidoti.
Hi, good afternoon.
Hey, Brian.
Thanks so much. 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 Q1 of 2021? Or is there any delays given the new environment out there?
Yes. We've added 2 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. So the 2 months delay in the bids, that's due in May?
Correct. So essentially just adding 2 months on to the bid submission period upfront, but no change in the end date.
Okay, great. And then and you mentioned the total shareholder return is unchanged using the 2019 base year. Should we be using the adjusted EPS when you strip out the favorable weather? Or is the base now does the base include favorable weather?
Weather is something we're always going to adjust out, Brian.
Okay, got it. And then I may have missed this earlier, but the $0.15 net reduction in the guidance, $0.09 of it or $0.06 was weather related in the Q1, but a total of $0.09 impacted the Q1 and the remainder is in 2Q. So 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 code a bit. So I'm not sure I apologize for your question, but I apologize.
Well, the $0.15 of reduction to your midpoint, which 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 And how much of that $0.15 was already realized in the Q1?
Okay. I see what you're saying. I think from our perspective, again, I just want
to be clear, pre COVID, post COVID and what we're ultimately 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. So 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. So I think half of that's in the Q1.
And then the second half, we're going to have COVID impacts, no doubt. And you can see there's 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. And I'm hoping that answers your question. That is kind of the other half, if you will, of the $0.15 So I think we've taken in consideration the cost control savings to get already to the $0.15 change that we're talking about.
Okay. So 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. And then, the 150 $1,000,000 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 the debt to cap?
Yes. 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 we can do an even larger debt offering. But we typically are doing things from a debt perspective once a year. And so this year, we accelerate 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. And then lastly, the $0.05 of bad debt assumption, is that in the midpoint of your guidance or is that 10 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 recovery from the jurisdictions, I would be in the lower end of my guidance, if that makes sense.
Just to
clarify. I didn't get recovery from jurisdiction.
And we'll take our next question from Paul Patterson with Glenrock Associates.
Hey, Paul.
Hey, can you hear me inside? Good afternoon.
Good afternoon.
So I wanted to touch base just most of my questions have been answered, but I wanted to touch base with really what the I'm not completely clear on what the COVID impact that you guys are forecasting is, other than you're expecting some sort of rebound in the 3rd Q4, I guess. And what I'm wondering is, I mean, when we're talking about this, are you guys expecting really what are you guys expecting in terms of the economic impact associated with COVID in terms of your 2020 guidance and the long term growth rate that you guys
have? Yes. 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 didn't do a we're not forecasting the GDP change in our various states. We essentially said based on what we know today, what's our expectations from perspective.
We do understand that in Montana, for instance, there's a lot of commercial customers, it relies on the travel industry, we expected quite a bit of impact there. But again, I think we've 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 have been opening up in the Q3, and that's moving a little bit quicker.
I think the fair point was raised earlier in the call, there could be impacts going into later of the year. We still feel good about that. But 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.
And Brian did mention earlier, we have some visibility into particularly our largest customers. Obviously, if you're a university, you must effectively close your campus. You're hoping to reopen for fall semester, not necessarily none, but you're hoping to. On the other hand, some of our largest customers are in the health sector or natural resources, refineries, and they have continued to be very active.
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. And those are more volumetric customers than the C and I customers as well. So that's something to keep in mind as well.
Okay. So 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. But 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% to 9% or am I correct? I mean, in other words, when you're looking at this, you're looking at 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 COVID the direct COVID 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 Q3 and nearly back to normal in 4th. So we are still showing detriment in the Q3 and detriment in the 4th quarter, but not back to our plan in either of those quarters by any means. So just want to be clear on that. I think to your point, in fairness, thinking about 2021, we've focused on 2020 and 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 an impact on our business remainder 'twenty and in the future years.
We have not gone through that analysis.
Okay. Fair enough. And then just the transmission issue, the question that came up, if I understood your answer correctly, the impact on the transmission revenues, etcetera, was pretty much what you guys had forecasted and really had to do with the closure of the units and industrial customer, really nothing with COVID. Is that correct?
Thus far. That's correct.
Okay. Okay. Thanks so much guys. Hang in there.
Thank you. Thanks, Glenn. Appreciate it.
And we'll take our next question from Jonathan Reeder with Wells Fargo.
Hey, it's been a long call, so try to keep it quick.
Hi, Jonathan.
Are you anticipating block issuance then or like a dribble like you did last time? I mean, 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. And so have been really thinking about Q2, Q3 and Q4. And we do like ATMs, always have. And but we will 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. And I feel good about the discussions there. So we'll hopefully have more to report on that in a future call, John.
Okay. Sounds good. And then, Bob, how does Talend taking half of the COVID or the CU4 deal? Yes, too much COVID on my mind,
right? How does pound taking
half of that deal impact your ability to control the destiny with respect to when CU4 might eventually close?
Well, we will still have a pretty significant say in that. And to the degree that Talend and our interests are better aligned, that's positive. Obviously, they decided that there was value in being informed, but they'll have much more ability to control that. And in addition to that, the State of Montana will have much more ability to control it. And fundamentally, I think decisions about the destiny of Unit 4 will be driven by the economics of the unit.
Does it meet our customers' needs in the best way possible and then by state policy decisions in Montana.
Okay. So that sounds like your overly concerned that they're taking the increased ownership impacts your ability to kind of keep it running through, what is it, 2,043 per kind of the long range plan that you've laid out previously, if that's what it is? Yes.
And Mohan, we make our our supply plans are based on a 20 year forecast, but they're adjusted every few years depending on facts at that time. So there's flexibility inherent in the planning process, the ability to make modifications. I'm primarily concerned about in terms of Talend coming into the transaction, no one party can dictate a closing date. That has to be a decision by the owners. So my real concern with Talend coming into the transaction is value that otherwise would have gone to customers and now will not.
And we'll take our next question from Eric Peterson with Millennium.
Hi, Don and Brian. Thank you for taking my question. I'll keep it quick. Thanks. I think you said 10% of commercial customers will be decoupled.
So what percent of residential and commercial load do you expect to be decoupled? And then 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. And 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 10% less than 10% of customers to commercial. I should know that.
I apologize I don't. I would reiterate though that 100% of the residential customers in the Montana Electric side and the residential side are impacted. So I know that's 100% of load there.
Okay, perfect. Thank you, guys.
And 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 another conference and that won't be the case at least for the next few months. But we do appreciate your interest, good questions and support for the company.
And that does conclude today's conference. Thank you for your participation. You may now