day, ladies and gentlemen. Thank you for standing by. Welcome to the Northwestern Corporation's 2nd Quarter 2018 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Investor Relations Officer, Mr.
Travis Meyer. Please go ahead, sir.
Thank you, Catherine. Good afternoon, and thank you for joining Northwestern's Corporation Financial Results Conference Call and Webcast
for the quarter ending June
30, 2018. Northwestern's results have been released and the release is available on our website at northwesternenergy.com. We also released our 10 Q this morning. On the call with us today are Bob Rowe, President and Chief Executive Officer Brian Bird, Vice President and Chief Financial Officer as well as several other members of the management team with us in the room today to answer your questions. Before I turn the call over for us to begin, please note that the company's press release, this presentation, comments by presenters and responses to your questions may contain forward looking statements.
As such, I will remind you of our Safe Harbor language. During the course of this presentation, there will be forward looking statements within meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements often address our expected future business and financial performance and often contain words such as expects, anticipates, intends, plans, believes, seeks or will. 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 on 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 Form 10 ks and 10 Q along with other public filings with the SEC. Following our presentation today, we will open up the phone lines to allow those dialed into the teleconference to ask questions. The archived replay of today's webcast will be available beginning at 6 p.
M. Eastern Time and can be found on our website. Again, that's northwesternenergy.com under Our Company, Investor Relations, Presentations and Webcasts link. To access the audio replay of our call, dial 888-203-1112, access code 750-8519. With that, I'll hand it over to Bob to run through the results.
Travis,
thank you very much and thank you all for joining us this afternoon. We are in Aberdeen, South Dakota, known as the Hub City and it's a major trading hub in South Dakota. As you know, the partnerships we have with our communities is very important to us and there's no place that more exemplifies that than Aberdeen over the last several days. We had a great community meeting, meeting with our employees this morning and yesterday got a chance to see some of the exciting growth and development in Aberdeen. It's a trading city, also a real center for which you can think of as industrial and agricultural work and we are very much a part of that.
Fact, our area manager also leads much of the economic development work in the Aberdeen region. So it's been a great several days. Turning to the Board, a number of you know Steve Addick, who just stepped up as Board Chair and Linda Sullivan is now Chair of our Audit Committee. And we continue to have just a very strong and constructive Board of Directors. So it has been a good meeting with a lot of good work done.
Turning to highlights for the quarter. Net income increased $22,000,000 or 100.6 percent as compared to the same period last year, and this increase was primarily due to a gain related to the adjustment of our qualifying facilities liability, and Brian will take you much, much deeper into that, along with favorable weather and to a lesser extent increased demand for electric transmission service. Diluted EPS increased 0.4 $3 or 97.7 percent as compared to the same period last year. Adjusted non GAAP earnings per share increased 0.16 dollars or 34% as compared to the same period. And the Board declared a quarterly dividend go deep into the financial results.
Thanks, Bob. On Slide 4, summary financial results for the Q2. As Bob pointed out, net income of $43,800,000 at $22,000,000 or just over 100% improvement quarter over quarter from a diluted earnings per share, dollars 0.87 to $0.43 or approximately 98% improvement again quarter over quarter. Quarter is primarily driven by an improvement in gross margin and I'll get into that more in a minute. Dollars 29,700,000 improvement, approximately 15%.
Continue to control costs, particularly in the operating, general and administrative expenses and that led to the results for the quarter. Speaking gross margin, on Page 5, get into the actual specifics. We had 200 and $29,600,000 of gross margin, that's a 29.7% or nearly 15% improvement. The primary improvement, particularly in the change in gross margin impacting net income, came from a $25,100,000 electric QF or Qualified Facilities Liability adjustment. I'll speak to that more in a moment.
In addition to that, we had good volumetric improvement on a year over year basis, Retail volumes on electric side up $2,500,000 and on gas side up $1,500,000 Continued good use of our electric transmission system, a 1.4 $1,000,000 improvement on the quarter are the primary items, again, moving gross margin that actually impacts net income. We have some things that impact gross margin that are offset elsewhere within the P and L. We had a $6,200,000 reduction or a decline on a year over year basis due to the Tax Cuts and Jobs Act deferral during the quarter. That was offset partially by $3,500,000 recovery of property taxes in our trackers. That net change for those items in gross margin are offset elsewhere in the P and L with minus $2,400,000 netting to the $29,700,000 increase in in consolidated gross margin.
Speaking about the $25,100,000 improvement in qualified facility earnings benefit. The reduction in that liability is really broken out into 2 parts. The first part is $17,500,000 benefit was resulting the reduction of an estimated future liability or forward looking look at our unrecoverable QF costs. Those out of market costs are expected to be $23,000,000 less and on an NPV basis, dollars 17,500,000 and so that reduction in that liability we actually backed out of our non GAAP results similar to how we handled the loss from this calculation back in 2015. The other component of the benefit was a $7,600,000 benefit due to the annual adjustment to reflect lower output and pricing of QF related supply costs and that was driven largely by outages at 2 of our QF facilities.
And due to the annual nature of that adjustment, we have not excluded that from our non GAAP earnings. Moving forward on to Page 7, just to speak about weather for a moment. We point out in the red box on that page that we estimate unfavorable weather in the second quarter was 1 point $4,000,000 unfavorable compared to normal and approximately $600,000 favorable as compared to the prior year. And speaking, as I look at it, the best way to describe it from my perspective in terms of versus normal, we had unfavorable weather in Montana. It was a bit warmer during our heating months there, even though it was a bit colder in South Dakota and Nebraska that helped offset that and it was a bit warmer in South Dakota as you actually captioned some cooling degree days.
But the Montana unfavorable, if you will, versus normal overwhelmed the South Dakota favorable. And you can see that actually on the map to a great extent as you look at the weather in Montana. It certainly wasn't cold enough in April May when we're getting heating degree days. Certainly then there's very little load, if you will, from a cooling degree day in Montana. But South Dakota did its part, certainly cold in April as you can see, and it was warm in May June and we actually had quite a bit of cooling degree days associated with South Dakota.
So versus the prior year, the South Dakota favorable actually slightly overwhelmed the Montana unfavorable on a year over year basis. Moving forward to operating expenses on Page 8, operating expenses of $160,300,000 or 6 point $7,000,000 improvement, approximately 4.4% on a year over year basis for the 2nd quarter. Operating and general administrative expenses, up $1,200,000 or just under 2 percent. Property taxes, up $3,500,000 or almost 9 percent and depreciation, depletion up $2,000,000 almost 5%. If you look at the increase in the OG and A piece, we really look at that in kind of 2 pieces though.
When you look at the change in OG and A expenses, actually impact net income, we actually were down $1,900,000 on a quarter over quarter basis. We did have an increase in employee benefits. We've had higher medical claims than we had the prior year, slightly higher pension costs on a year over year basis primarily drive that. But we did have favorable variances in terms of maintenance costs, lower labor costs, the DCIP program ended in 2017 and some other favorables that helped to keep our cost from that perspective. Those things that impact net income down on a year over year basis.
Those changes in OG and A that actually are offset elsewhere in other income, we had from a non service cost component, we have an increase in OG and A that's offset in other income of 2,600,000 dollars And as you know, our non employee directors deferred comp impacts both OG and A and other income as well. That was 500,000 dollars The change to the total of those two items was $3,100,000 and the net effect of all of that was a $1,200,000 increase in operating, general and administrative expense. Property taxes were up $3,500,000 as I pointed out earlier, primarily higher plant additions and higher annual estimated property valuations and depreciation and depletion up $2,000,000 primarily due to plant addition. Moving forward, Page 9 and operating net income. Operating income is 69,200,000 a $22,900,000 or nearly 50 percent improvement.
Below that, interest expense was relatively flat on a quarter over quarter basis. Other income was an improvement of $1,400,000 primarily as a result of things I talked about previously, the decrease in other pension expense and increase in value deferred shares from a non employee director deferred comp basis, both of those were offset a bit by lower capitalization loans and funds for use during our AFUDC. Those items lead up to an income before taxes of $46,900,000 at $24,500,000 improvement or 109 percent. And below that, of course, income taxes were up $2,500,000 and primarily a result of higher pre tax income offset partially by the increase of $2,500,000 The primary driver for that, as you can see at the top of the page, is the increase in pretax income. And even at a lower rate, we did have a higher increase on the income tax calculated at the federal statutory rate.
Below that, three items also had an impact. The state income benefit was actually $1,300,000 less. That's primarily as a result of loss of bonus depreciation. Flow through repairs was slightly less as well, primarily as a result of lower federal statutory rate. And production tax credits, the benefit actually slightly better and as a result of higher pretax that we've had thus far through 2018.
One other point thing I'd point out on that page is the effective tax rate for the quarter is 6.6%, but we do anticipate our year end ETR to be again between the 0% to 5% range. Moving on to the balance sheet. Total assets stayed flat. Property, plant and equipment are up just under $100,000,000 We also see a decline in accounts receivable similar to what you'd see from the seasonality that we have in our business. On the liabilities and equity side, again relatively flat.
Shareholders' equity was up $100,000,000 Think the improved earnings and think of the incremental utilization of our ATM program helping out there offset by $100,000,000 reduction in debt. And that activity, as you can see at the bottom of the page, impact our ratio of debt to total capitalization, now down to 51.1 percent comfortably in our 50% to 55% range. So continue to look at means to delever the company. Moving forward from a cash flow perspective on Page 12, we had a $68,000,000 improvement in cash provided by operating activities, primarily due to the higher net income, but also improved collection of customer receipts and increased recovery of certain costs for our supply trackers. An incremental cash flow plus, the benefit of proceeds from the issuance of our common stock allowed us to have a bit of an increase in our cash used in investing activities.
We did invest in 2. Wind, made an acquisition, small acquisition there to continue to grow our generation fleet. We also used that incremental cash, as I noted earlier, to pay down just approximately $100,000,000 of debt. Moving on to Page 13, adjusted non GAAP earnings. And those of you who are with us on a quarter to quarter basis certainly understand how this schedule works.
But effectively, what we do is take the GAAP earnings from the end of the quarter, 2018 is in the far left margin and the gap from 3 months ended in 20302017 on the far right margin and we move towards the middle to get to the non GAAP numbers for comparison purposes. We do exclude certain items on a going forward basis. We do exclude weather. We did have unfavorable weather both in 2017 2018 in the Q3. This particular quarter in 2018, we also excluded 17.5 $1,000,000 of the liability reduction for the QF liability and that's shown as well.
We also have 2 other items that are just primarily there to, from a non GAAP basis, properly display what we believe a better display of our OG and A expenses since both the pension items and the non employee deferred compensation I talked about earlier are effectively offset in OG and A and other income. When you take all those items into consideration, as I mentioned earlier, our diluted earnings per share was $0.87 for the quarter, adding back $0.02 for unfavorable weather and taking out $0.26 for the gain on QF liability, we had a non GAAP diluted EPS of $0.63 for the quarter that compared to $0.47 for the prior year quarter. Also looking at the variances throughout the P and L, when you make those adjustments, we still had strong improvement in gross margin of about 5.7%, continue to stay on top of our operating expenses. And even though we had increases in property taxes and depreciation, we're able to actually manage on a non GAAP basis, our OG and A to a decline that helped keep total operating expenses up only 2.3%, which certainly helped operating income at 17% and flow through down to pre tax income of 26% and net income at 38% improvement.
So a good quarter from that perspective. Moving on to Page 14, our 2018 earnings guidance, just at the chart at the top of the page, the blue bars and the square boxes demonstrates over time from 2012 to 2017, 6.8% non GAAP adjusted EPS growth rate, plus a history of meeting our guidance. To the far right of that chart shows our 20 18 guidance of $3.35 to $3.50 We're reaffirming that guidance during this quarter. One thing I would like to remind folks in terms of what's in our guidance and what's not, those assumptions there, I think you are all well aware, we always assume normal weather. We provide an income tax rate, which is 0% to 5% of pre tax income.
And we provide guidance in terms of our diluted average shares, dollars 50,100,000 No change in that from prior quarters, so thus not planning any additional equity for the remainder of the year. I do want to point out that our guidance does not include any it does include, I should be clear, equitable regulatory treatment on our Tax Cuts and Jobs Act filing, in line with our filing and then a recovery of Montana Energy supply costs is proposed in our pending PCCAM filing. Lastly, continued investment in our system to serve our customers and communities expected to provide a targeted long term growth of 6% to 9% total return to our investors through a combination of earnings growth and dividend yield. Turning to Page 15 and talking more about our full year non GAAP guidance. At the top left side of the page, you see our 6 month ended June 30, 2018 actual results, reported GAAP of $2 again on a year to date basis, dollars 2.05 diluted EPS when you remove on a year to date basis favorable weather of $0.05 and remove the gain on the QF liability of $0.26 it brings us down to an adjusted non GAAP year to date of 1.74 dollars In order to achieve our $3.35 to 3.50 for full year EPS to the far right in the top of the page, we will have to achieve in quarters 3 and 4 a total of $1.61 to $1.76 of EPS.
And looking at our actual down below for the 6 month ended June 30, 2017, you can see in Q3 and Q4, we achieved a non GAAP number of $1.70 which is comfortably in between what we need from the remainder of 2018, the $1.61 to $1.76 Moving forward, I guess I pass it back to Bob, actually looking forward.
Thank you, Brian. Great segue, whether planned or not. Starting very high level on the regulatory front, obviously, we will continue to focus on the shared care treatment of implementation of federal tax We do have proceedings underway in multiple jurisdiction there. And the ultimate goal is simply to ensure that the benefit does flow through to customers in some way, while very importantly keeping shareholders, keeping investors whole. And we have proposed mechanisms to ensure that that occurs.
Secondly, continuing to move ahead implementation in Montana of a new power cost and credit adjustment mechanism. And then 3rd, working on preparation of electric rate case to be filed by the end of 2018 based on a 2017 test year. And we have been consulting with a stakeholder group, our latest stakeholder in Montana, the customer vision group. And there what we're engaging them to discuss really is future looking policies to allow us to be aligned as much as possible with our customers' interest. Our core investment, you'll see this in our capital plan, continues to have a very strong transmission and distribution infrastructure focus.
There we've transitioned from successful implementation and conclusion of our distribution system infrastructure plan to really an end to end infrastructure investment plan. In Montana, that was with guidance from an infrastructure stakeholder group. And in South Dakota, guidance from a parallel group, an area of particular interest in South Dakota, with what we call our network South Dakota Infrastructure Group, really creative ways to build out our natural gas service to more communities and talk about that in more detail in over the coming quarters. Obviously, safety and compliance are important values and we do have significant investment associated with the CRMSA integrity verification process and requirements. Grid modernization, we've taken a conservative approach to grid mod the grid mod focusing initially on the basic infrastructure, but now moving into both advanced metering infrastructure management systems.
And we're moving towards implementation first in Nebraska and South Dakota. Our supply group is actively updating our 2 electric supply plans. In Montana, the focus is least cost, lowest risk approaches to address our core needs and that is for sustained intermittent capacity and reserve margins and we've discussed those needs, that exposure in detail on previous calls. And you can look for a Montana plan towards the end of this year. A major activity in the Montana plan has been the release of a request for information and responses to the RFI are due by the end of this month And then those will be an input into the Montana plan.
In South Dakota, has been a generation fleet assessment to evaluate economic retirement and replacement opportunities that potentially provide benefits, not just on the supply side, but also on the local distribution side. I think you can look forward to us discussing the South Dakota plan and implementation in more detail in our October call. We are a low cost operator, particularly marketing against our peers. And we continue to monitor costs, including labor benefits and the first property taxes. And I think I've done a good job of mitigating those increases.
So cost control is an important ongoing value. So a little bit more detail on implementation of the Tax Cuts and Jobs Act. As I mentioned, dockets have been initiated in each jurisdiction to ensure that customers do receive benefits in ways that are fair to investors as well. So we do have filings open. We don't expect material impacts from IREA, FERC or Nebraska filings.
Of June 30, we deferred approximately $13,500,000 associated with TaxAct implementation, but the revenue deferral was offset by a corresponding reduction in income tax expense. So as a result, no impact to net income. We calculated customer benefits using 2 alternate methods, 1 based on current expenses and 1 using an historic test method. The concern of course with the historic method is it's very difficult to go back and recreate all aspects of an historic test year. And if you're not able to do that essentially, turn back the clock or reopen all the books, there's a real concern, I think, asymmetry and fairness to investors.
The expected full year 2018 revenue reduction for the current period method would be $18,000,000 to $23,000,000 which again would be offset by an equal reduction in income expense and therefore would have no impact to net income. On the other hand, application of the historic method could result in customer refunds that do exceed the 2018 tax benefits and therefore would result in a $5,000,000 to $10,000,000 of additional pre tax earnings and cash flow detriment for the year. Use of the deferred revenue or regulatory liability will be determined in the pending dockets in Montana and August 30 hearing has been scheduled, South Dakota and Nebraska schedules are pending.
So as a result
of tax reform, we've updated our 2018 ETR assumption to between 0% 5%, and previously that was 8% to 12%. We've also reduced our deferred tax liability by about 3 $20,000,000 as of December 31 last year, and this reduction is offset in regulatory assets and liabilities. NOLs are now anticipated to be fully used in 2020. Previously, we had projected 2021. We currently and this important, of course, we currently believe our debt coverage ratios will be adequate to maintain existing credit ratings.
However, further negative regulatory actions could lead to credit downgrades and could necessitate additional equity issuances. Those sentences are important. Turning to the capital forecast for 2018, we've discussed this before, we see really a level capital projection based on current plans out over the next 5 years and also a good balance between jurisdictions and between electric and gas. And the cumulative current 5 year estimate is 1,596,000,000 We anticipate funding these investments with a combination of cash flows, again, aided by NOLs through 2020, as well as the equity distribution. I should note that the equity distribution is now complete and had a gross average share price just below $58 So we consider that to have been a successful program.
Significant capital investments that are not in the above projections But based on the But based on the plans as reflected in this capital forecast and assuming no negative regulatory actions, we don't anticipate further equity issuances at this time. As we've discussed previously, the changes in the 2018 forecast involve first, about 120 $3,000,000 of previously included capacity generation has been removed pending issuance of the jurisdictional supply plans and included, there's been about $126,000,000 of incremental investment related to grid modernization and AMI infrastructure starting first in South Dakota and Nebraska. And should note again that for those 2 jurisdictions, we did previously include about $28,000,000 in investment. So with that, we can open up the bridge for questions and I did ask our operator to queue up the easy questions first.
Thank We'll go to Michael Weinstein with Credit Suisse.
Hi, guys.
Good morning, Mike.
Hey, just it looks like on Slide 15, you are excluding the QF gain, right, from guidance as well, right? It's not part of your it's not going to be part of your means to reach guidance for this year, Ryan?
That's correct. The $17,500,000 excluding not included in our guidance, correct.
Okay. Just wanted to confirm that. And could you talk a little bit about can you just confirm that you will be filing the rate case no later than September 30 even if the PCAM case is not resolved by that time?
All systems go, yes.
So I mean how do you do that? How do you file the rate case without knowing knowing how the generation side is turning out?
We will have to work through that. There certainly will be noise, but we will get it done. Okay.
And could you just give a little
bit more color on bifurcation, the ruling on that and why you think Commissioner Cavula might choose to recuse himself from the case?
We can't speak for Commissioner Kahulah, but he would serve through the end of the year and that would be in the early stages of the case, but that really is a question for Commissioner Kobula. In terms of bifurcation, our experience has been, I think the Commission's experience has been that bifurcation has really allowed the cleaner and more orderly conduct of cases. So we think that's a positive in that scenario than revenue requirement is an input into cost allocation and developing a pricing structure and that's worked well. We have concern about the emissions approach to our bifurcation requests effectively leaving the revenue requirement open. We think that creates an extended period of uncertainty and certainly is troublesome from an investor perspective as well.
Right. And I think is it true that Commissioner Cavula recused himself from the bifurcation decision?
Should point out that in terms of the if you're referring specifically to the work session earlier this week, we don't have a written order on our motion for reconsideration yet.
Okay. Okay, thank you. Thank you. Thanks, Mike.
Our next question comes from Julien Dumoulin Smith.
Hey, good afternoon, guys.
Hey, Julien.
Hey. So a few different questions here. Maybe to pick up on where Mike left off on the QF stuff. Can you comment a little bit more specifically on the $7,600,000 benefit to the annual adjustment? First, is that in your guidance, just to be very clear, when you contemplated?
I imagine not. But then can you give a little bit more thought process around how the outages relate to the or if at all related to these price escalations or why this impact now maybe?
Well, the outages have an impact because we're actually able to procure power at a lower cost than the QF costs that are in the particular liability itself. So the outages certainly helped. And to your first question, in terms of any amount in guidance, we did have a small amount in guidance at the start of the year because one of the QFs actually was out of service for a period of time in the Q4 and we knew that going into the period of time. But it certainly wasn't the level of the $7,600,000 benefit that we had this year. And should also point out, this is we did have a $2,100,000 benefit year as well.
So the $7,600,000 was the increase, if you will, on a year over year basis.
Right. But more importantly, the outage element here doesn't necessarily impact us on an ongoing basis. This, as you say, is
a year over year impact
based on a specific outage.
That's right.
That's a
year over year. It doesn't impact things on a going forward basis unless these QFs were out of service for a long period of time.
Right.
And to be clear, you had some amount of this, not necessarily defined in your guidance based on what was already looking like a setup into 2018 with some degree of outage on this asset? Yes. Correct. All righty. Excellent.
I'm going to just keep going here on can you give us a little bit more of a sense of the earnings impact you use an asymmetric sharing band in PKAM? Just can you
give us a little
bit of a sense of maybe even the sensitivities to think about that real quickly? And then maybe in tandem with that, obviously, the process is ongoing here. Is there any chance to settle here just to kind of hit that?
I'll speak to the second question. We are always open to constructive discussions with parties. On the other hand, we can't discuss settlement discussions specifically, but we're always open to talking to parties.
And on the first question, Julie, it's very difficult for us to ascertain the impact of asymmetrical sharing of deadbands and the like and certainly not comfortable talking about this on this call.
That's fair enough. I know it's a little tricky. Now just the last oh, sorry.
I'm going to ask one thing. I know that for some parties, including us, the ability to this is a generic comment, but the ability to settle a case depends on some comfort with how the regulator in that particular case will view a settlement and how much confidence you might have that a settlement will ultimately be approved as agreed to.
That's a fair comment. Perhaps just a last quick question. Can you confirm the $5,000,000 to $10,000,000 of pretax earnings impact from applying the historic method with regards to tax reform is a one time element? Or is that an ongoing element into 2019 and onwards, if indeed adopted?
I'd argue it's an annual impact until you get a rate case resolved, right? So you could argue annual impact for 2018 and a portion of 2019 could be an impact as well. Now again, if the historic method, of course, on a going forward basis, they will capture our new tax structure, but we will also capture all the increases in cost elsewhere, which would have been an appropriate way to handle this issue to begin with.
So your expectation is basically by the time that you get new rates, insert whatever date that that may be, this should effectively roll out?
Correct.
Okay. Excellent. All righty. Excellent. Well, thank you.
Our next question comes from Paul Ridzon with KeyBanc.
Can you just quickly review
the calendar on the PCAM and tax dockets?
Sure. Let us pull that up quickly. On PCAM briefing is ongoing. Reply briefs are due on August 31. So we don't expect a decision until September at the earliest and obviously the commission needs time to review the brief schedule work sessions and then ultimately decide, but the window will open essentially in September.
In turning the Tax Cut and Jobs Act implementation in Montana, opening an intervenor testimony has been filed, rebuttal and cross intervenor testimonies filed. Rebuttal testimony is due August 2nd. The hearing will be held on August 31 with deliberations, briefs and deliberations sometime after that. In Nebraska, that tentative settlement reach, Nebraska is a little bit of a different approach where we typically negotiate regulatory decisions municipal jurisdictions and then those are submitted to the Nebraska Public Service Commission for review. So at this point, we're waiting for an order from the Nebraska Commission.
In South Dakota, there's active settlement discussions with the commission staff and those are positive
to date.
At the FERC, there's no real deadline by which the FERC needs to make a decision. However, earlier this spring, the FERC did indicate that it intended to act on all of these filings and they of course have many within 180 days, which would move you into September or November.
Any commentary on any legislative intervention on the PCAM issue? And have legislators become involved in this with the commission?
The interim legislative committee certainly has an oversight function and is aware of the docket and developments in the docket, but I have no comments beyond that.
Okay. Thank you very much.
We'll now hear from Jonathan Reeder with Wells Fargo.
Hey, Bob. Did I miss
you give a more specific time frame as of when you think the tax reform treatment in Montana would be decided?
Yes. In Montana specifically, there will be a hearing starting on August 30. And subsequent to the hearing, there will be presumably some kind of briefing schedule and then that would push the decision potentially to later in the year.
Okay. But so other than before year end, no real specifics at this juncture?
I don't I would be hard pressed to say anything beyond that.
Okay. Did the parameters of the potential kind of historic test period method
kind of get tweaked? I thought
on the Q1 call you gave some bit higher numbers like an $8,000,000 to $12,000,000 range as opposed to the $5,000,000 to $10,000,000 side of the day.
Yes. Brian, go ahead.
I think they did change slightly. I mean, obviously, we're through the midpoint of the year and we looked at adjusted numbers a bit and expectation that that could change, but also take in consideration the total. You'll notice that we increased the range for the current year method, but also decreased the range from the historical methods. And one would argue there's differentials decreased a bit.
Okay. I got you. And then finally, can you give a little more color on the customer vision, stakeholder process in Montana and how if at all, it's shaping the way you're approaching the rate filing and what you plan to request?
Yes. Well, the original notion was to work with this group to at least narrow differences, identify areas of key interest, and then use those to inform the rate design filing in a second part of the case. Given where we understand the commission is at this point, we intend to file a complete soup to nuts case at the end of September. We've had tremendous success with stakeholder groups, certainly over the last 10 years that I've been with Northwestern. We take them seriously.
We find the input valuable. In this case, we've got a very diverse group, an expert external facilitator. The rate filing will be a backdrop to discussions in the customer vision group. But really what we're trying to do is identify the set of policies that are appropriate at least for this company in Montana going forward to help address some of the disconnects we think between the current regulatory structure, customer expectations and public policy. What we're doing in that process right now is trying to gather information from outside of Montana, and relatively more relevant to Montana.
So actually on Monday, Anne McKay, the former Illinois Commissioner, who was in the middle of regulatory reform and the early stages of grid modernization in Illinois is going to be speaking to the group. Last month, we heard about a very broad sustained effort in Minnesota. We're also going to be looking this fall at some interesting things that Green Mountain has been doing when Mary Powell, the CEO from Green Mountain comes out. So we're putting a pretty diverse set of perspectives in front of this group, but trying to look at some examples that might be a little bit more relevant to Montana than would, for example, the New York
picture kind of focus, stakeholder throughput. Near term, I guess, it would influence your rate design aspects of the case?
As originally conceived, it was going to be an input. But again, now we will be filing a complete rate case at the end of September. So that will that filing will be based on our views, not really on input from the group because that discussion really is still in the not entirely, but primarily in the information sharing stage.
Okay. All right. Well, I appreciate you taking the time to answer my questions and good luck as you press into the important stuff with the commission coming up.
Thanks, Jonathan. Thanks, Jonathan.
Our next question comes from Andrew Levi with ExodusPoint.
Hi guys. Can you hear me?
We can hear you, Andy.
Actually most of my questions were asked already. Just 2 simple ones. So just where do we fall as far as your guidance range right now? Do you guys think are you really in the middle, the low end, high end based on what you've seen thus far? Again, excluding any regulatory changes.
Yes. Andy, we have reaffirmed our $3.35 to $3.50
Okay. So you're kind of trending towards the middle, is that what you're saying?
Nope. And it wasn't a simple question, was it? We're reaffirming our $335,000,000 to $350,000,000
Okay. That's fair. And then
the second one, I guess, is more for Bob.
But where do you guys fall as far as your view on M and A? And I know we've discussed this before, Bob, but in the context of NWE, whatever you'd like to say and obviously in context of continuing consolidation within the industry?
Really at this point, no comment. We've offered our philosophical views previously, and I really don't have anything to add to that.
You guys don't have much to say.
We're kind of a quiet bunch here in Aberdeen.
Okay. Thank you. You guys have a good weekend.
Thanks, Andy.
We'll go to Paul Patterson with Glenrock Associates.
Hey, good afternoon.
One of my questions have been answered, but just a few quick ones. Just on the $17,500,000 that benefit that's not included in your ongoing earnings, how does that work over time as the contracts work their way through, if you follow me? Is there any earnings impact that we should think about that going forward?
Yes. We have non cash interest associated with that liability that as a result of reduction of liability, we'll see an improvement in non cash interest of about $1,300,000 each year. But we are that's a periodic liability adjustment. And so you can have adjustments. I mentioned the last time we made an adjustment was in 2015 for that.
So there's exposure by the way back in 'fifteen that was a loss that we recorded that year. So there's going to be potential impacts on earnings, but that contract that provides that particular exposure goes through 2024. So that's the period of time that we could have exposure to that contract in terms of volatility to earnings. And in addition to actual production from these units and what's actual pricing. So those impacts come into play as well.
Okay. So there might be a if I understand you correctly, there might be a benefit going forward, but the fact that this thing is always being adjusted, etcetera, means that there's not a lot of predictability to it.
Does
that make sense?
That's a great summation.
Okay. And then the comments that you made with respect to equity issuance not needed in the absence of a negative regulatory outcome, is that just sort of a generic statement? Or I mean is there I mean just to sort of put a finer point on it, should we think about this in relation to the PKM or with respect to the upcoming rate filing? Or could you just elaborate a little bit more on that? I mean, or is it just sort of you're just sort of highlighting that because of the regulatory environment that you're in?
Do you follow what I'm saying?
Yes. I'm comfortable with your question. First of all, let me speak about the rate case. It has nothing to do with the rate case so ever. Matter of fact, we're looking forward to the rate case.
There's been a tremendous amount of investment we've made in this company and we think we've done customers the right thing to try to stay out of rate cases for years, but it's time to get recovery on that investment. So we look forward to the rate case. We just see tremendous amount of exposure on tax reform and PCAM and don't know what those outcomes. And as my earlier question, it's difficult to gauge what those outcomes would be. I'm not sure where PCAM ultimately will end up.
It's easier to understand the differential on tax reform. We just want to be clear that there's a potential that we could have to do something from an equity perspective. But I also want to tell you, there's certainly it's our intent to try to manage any outcome without having to raise equity, to try to manage our business accordingly.
Okay. I appreciate it. Thanks so much and have a great weekend.
Thank you. Thanks, Collyn.
And we have a follow-up for Michael.
Hi. One quick follow-up on the guidance. So the $17,500,000 benefit from the QF, that's excluded and not benefiting guidance. But the $7,600,000 benefit from the outages related to the outages, that's the ongoing adjustment. That is actually in the guidance, and that was about a $5,000,000 improvement over last year.
Did I read that right?
Yes. Michael, let me just straighten out a little bit though. You're directionally correct. Since the $7,600,000 that was the increase a year over year basis. There was a $2,100,000 gain last year, dollars 7,600,000 increase this year.
And so we had a small amount, I'm not going to give you the actual amount of an impact built into our margin guidance associated with the fact that we were aware of outages at the end of the year. It wasn't certainly anything near the 7.26
percent. That's right. So I mean, you figure if it was if you were assuming the same thing as last year, you're about a little over $5,000,000 more. This year, it's like almost $0.07 a share. Is there any reason why we didn't move up the guidance range at all for that?
Or is it being conservative? What's your thinking on that?
My thinking is we've reaffirmed our guidance at 3.30. Okay.
Thank you.
There's quite a bit of the year left too from our perspective and I kind of want to see how things play out. Yes. Brian has been It's only second quarter.
All right. Thank you very much. Have a good weekend.
Thank you. Thanks, Mike.
Thank you. It looks like we have a follow-up from Andrew Levy as
well. Okay. Let's try this one more time. So if you have normal weather and normal conditions between now and the end of the year and you book that extra $7,400,000 so everything kind of comes in as expected and as the year had been guided to, would that amount lead to earnings above midpoint?
I appreciate you trying again, Andy, my answer is the same. We are reaffirming our 335 to 350. And what I wanted
to say is, thank you for the follow-up questions. This is great practice for Brian to understand in a month or so in the tax docket.
Well, if you needed someone else to testify for you, I'll help too.
Come on out.
Have a good weekend.
Thanks.
Over the quarter. At Page 20, we summarize some, we characteristics of the company. We've talked about these best corporate governance practices. I spent a minute at the top of the call talking about directions of our Board. In fact, we are a pure electric and gas utility freight foundations.
We paid attention to those basics. We do have strong earnings and cash flow. And we talked about attractive, I would say maybe more actionable future growth prospect. So those are things to keep in mind. I did my pitch for the Chamber of Commerce at the top of the call.
And the photo here on Page 20 is Mystic Dam, right on the edge of the Beartooth Wilderness. It is one of the most amazing places. And I think since you cover the company, you owe it to yourselves to come out and we'll take you on a hike up there. And if it's in June, our supply Vice President, John Hines will put you in a kayak. And this is, I've touched on this, the hydro system obviously has been such a great asset for us and we have realized so many values out of the hydro system beyond the energy that was really priced into the transaction and this is very much a part of that.
So again, thanks for joining us on the call. Look forward to seeing you over the coming months and visiting next quarter.
Thank you. Ladies and gentlemen, again, that does conclude today's conference. Thank you all again for your participation. You may now disconnect.