Q3 2019 Earnings Call
Good day and welcome to the northwestern corporations third quarter 2019 financial results conference call webcast.
At this time I would like to turn the conference over to Northwesterns Investor relation Officer, Travis Meyer Sir. Please go ahead.
Thank you Katie good afternoon, and thanks for joining northwestern corporations financial results conference call for the quarter ending September Thirtyth 2019, Northwesterns results have been released in the release is available on our website at northwestern energy Dot Com. We also released our 10-Q this morning.
The call with US today are bobrow, President and Chief Executive Officer, Brian Bird, Chief Finance Financial Officer, and we also have other members of the management team in the room with us today to address your questions if needed.
Before I turn the call or for us to begin please not companies press release. This presentation comments by presenters and responses. Your question may contain forward looking statements as such I'll remind you of our safe Harbor language.
During the course of this presentation there will be forward looking statements within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 forward looking statements often address our expected future business and financial performance and often contain words, such as expects anticipates intends plans believes seeks are well.
The information. This presentation is based upon a 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.
So our expectations and beliefs are based upon reasonable assumptions actual results may differ materially the factors that may affect our results are listed in certain of our press releases and disclosed in the company's Form 10-K in 10-Q, along with other public filings with the FCC.
Following our presentation today, we will open the phone lines to allow those dialed into in the do that teleconference. Chats questions. The archived replay of today's webcast will be available for one year beginning at six P.M. eastern today and can be found on our website again, that's at northwestern energy Dot Com under our company Investor Relations presentations and Webcasts linked with that I'll hand, it over.
Our CEO Barbara good afternoon, thanks, very much for joining US today, we are in Brookings, South Dakota, a great dynamic community that we're privileged to serve as always when we made it a out enough in the field, we started things off with a community reception. The other night not was.
Hosted in the the meetings facilities that dike House Stadium.
And our South Dakota Board member Dana Die Couse was the champion for developing that great facility. If your football fan you might have a.
See the game on the U.S.P.M.
Same day on Saturdays between the Jackrabbits and that's bison of North Dakota, and they've kind of a friendly rivalry between our North Dakota Board member 20, Clark formerly of the Federal Energy Regulatory Commission.
And David Dyck House and of course, Tony and his team won the game, but it was sure upgrade show for.
For bookings and then this morning, we had a good.
Breakfast meeting with our employees here in bookings and from around some around the area.
Turning to third quarter highlights net income for the quarter decreased six $9 billion or 23% as compared to the same period last year and the decrease was mainly due to higher operating costs lower demand to transmit energy across our system and lower electric retail volumes due to mild weather. These decreases were apparently.
Set by a reduction in revenue in 2018 due to the impact to the tax cuts and dropped act higher recovery of our Montana electric supply costs and an increase in Montana electric retail rates.
Associated with the pending rate case that being subject to refund.
Diluted EPS decreased 14 cents worth 25% as compared to the same period last year.
Weather normalized non-GAAP adjusted EPS was 50 cents, which was eight cents or 13.8% lower than this period last year in June the Federal Energy Regulatory Commission issued an order acceptance for filing with FERC for Montana transmission assets ranching interim rates again subject.
To refund effective July onest.
And establishing a settlement procedures and then terminating the related tax cuts and jobs Act implementation filing. So the FERC process is also moving ahead, a true settlement conference several technical meetings and the next Triple meeting will be in viewed this week I also we announced the results of our South Africa.
Due to competitive solicitation process for new generation will come back and talk about that and just a few minutes and then the board declared a quarterly dividend.
57.5 cents per share payable.
December 30, Onest to shareholders of record as of December 13th and then today, The Montana Commission approved the revenue requirement stipulation and the rate case.
Along with a stipulation concerning development of.
Green pricing alternatives, then we'll come back to talk about that a little bit more as well so with that I'll turn it over to our Chief Financial Officer, Brian . Thanks, Bob as Bob pointed out a net income was 21.7 million.
6.5 million or 23% less than the prior year period.
Gross margin was up 2.9 million or 1.4%.
But that a increase was not enough to overcome increases in operating general expenses property taxes interest expense other expense and income tax for the quarter, thus, resulting in the decline on a year over year base, it's getting into more details on ace ER gross margin just in fairness it wasn't disappointing quarter.
Gross margin certainly.
Points to that if you take into consideration 2.9 million increase most almost all of that coming from electric side of the business that 1.4% increase was not enough to cover our cost and again disappointing in.
In a in more detail on those increases in gross margin the first to their tax cuts and job Jack impact in the Montana electric supply cost recovery, really where 2018 detriments or the benefit on a year over year basis as result of not having those items in 2019.
Those were pretty much offset by lower transmission revenue through a waste the square feet seeing fewer people utilize our transmission system, primarily as result of activities that are lack of activity at the culture plants and some other items that impacted gross margin you look at or things that kind of.
And our underlying business on the electric side of our business the 1.6 million increase in Montana electric rates.
That we receive are recorded for this quarter based upon the stipulation was not enough.
To cover the shortfall of electric retail volumes.
And in fact on the gas side.
The small increase in natural gas retail volumes was not enough to cover a step down than we had in Montana natural gas rate. So those changes all that it up to a very flat margin increase of $8.3 million and so as I said disappointing from a margin perspective, the other items shown here property taxes in Ptcs and other.
Operating expenses flowing through the tractors those netted to an increase of 2.6 million for the total increase in gross margin of 2.9 billion.
Moving forward so whether on the next page there was a bit of a perfect storm for Oh very weak.
Weather quarter for us heating degrees are shown at the top.
There's very little.
Heating degree days or that we received in the third quarter, it's typically a cooling quarter for us, but even in September we might get some heating degree days. It was the only month that we were actually warm in Montana. So he got very little heating degree load. If you will during the quarter and and again, the third quarter being a cooling.
As you can see by the map down below your two months, where you'd expect to see most of your cooling July and August we were colder.
And all our jurisdictions during that time period. So it's been a perfect storm as you can see we estimate on favorable weather in Q3, 2019, resulting in a 5.7 million pretax detriment as compared to normal and a 4.6 million pretax detriment as compared to Q3 2018.
Then move forward to operating expense on the next page.
Operating expenses 164.3 million or 4.4 million or 2.8% increase on a year over year basis.
Focusing on those that the changes enogen and actually impact.
Net income.
It's things we've talked about on previous quarters things that we have made good decisions to invest in during the years, putting more money into our pension.
We have a underfunded position, particularly in Montana, and then investing at higher dollars in hazard trees.
Are the two biggest drivers for this increase in opening in a during the quarter well, so has higher labor and legal costs and some other costs offset by some generation maintenance, primarily some timing of some generation maintenance during the quarter those things added up to a change in ogone items impacting net income of six.
Point 2 million.
[noise].
Offsetting those two degree were 3 million items that are offset elsewhere within the piano.
Those totaled 3 million for a total increase of 3.2 million you know gionee for the quarter. In addition to that 3.2 million dollar increase we also had a $1.6 million increased property taxes.
Primarily result of plant additions.
And then lastly, depreciation depletion actually was down.
For 400000, that's primarily result of the depreciation adjustment to the rate case, the stipulation offset partly by a plant additions.
Moving forward in terms of operating the net income you know taking all of those matters and the consideration you'd have an operating income of 46.4 million, which was 1.4 million or 2.9% worse than the prior year period. We did have higher interest expense, primarily due to higher borrowings we had a.
Fans increase of 2.4 million, primarily as the offset to those items shown.
As elsewhere on the CNL in the.
In the gross margin as an offset.
2.4 million increase in other expense there.
That.
Those things contributed that to income before taxes of 22.2 million or 5.6% or 20.1%.
Worse than the prior year period, and then lastly.
We did have income tax expense.
The increase of 1 million on a year over year basis, netting to net income of 21.7.
Millions.
If we moved speaking of income taxes that we moved the next page in terms of the reconciliation there.
Taxes, as you might expect might be down because of lower.
Pre tax income both on the federal and state side, but we did have a prior year permanent returned to accrual adjustment or thinking that this way adjustment that reflects the filing of our tax return we had a swing there of 3.6 million and really offsetting.
Any a reduced reduction in.
Taxes as a result of lower pretax that change at 3.6 million on a year over year basis or seven cents is the primary driver for.
And income tax expense increase on a year over year base.
Moving forward to the balance sheet I'm not a lot to report here from the balance sheet perspective, it's nice to see shareholders' equity to go over 2 billion.
At the end of September 32019 also.
Good to see ratio of debt to total capitalization being lower end of our 50% to 55% range that's very helpful.
Moving part of the cash flow statement.
We have seen as we did report in the last quarter.
Decline in cash flow or in a year over year basis.
Through nine months cash from operations was down 92 million really driven by four things. We had a credits that we had to give to customers through tax cuts and jobs Act that was resolved in 2018, but the the benefits flow back to customers.
In 2019, we've had an under collection of supply costs during the year.
For energy generation interconnection.
Weve refunds, we had a this year compared to deposits in the prior year. Then lastly, we had a very small insurance proceeds in 2018 most of those items were all the first six months of the or cash flow as a whole for the quarter was relatively flat.
Nonetheless, the year to date basis through nine months down 92 million at that coupled with an increase in investing activity is about 32 million.
As a result to just have to issue more debt.
During the year of it certainly on a year over year basis.
Moving forward to adjusted non-GAAP earnings.
As you know and followed us for some time, we'd like to show gap on the outer edge is this page and then move with the adjustments towards the center of the pace you can easily compare the non-GAAP numbers from 19 to 18 during the quarter to the only two adjustments well the only adjustment really was unfavorable weather in 2019.
And unfavorable weather in 2018, I'm, taking those into consideration those adjustments that actually impacted net income.
Our GAAP EPS in 2019 went from 42 cents to.
The 50 cents and that compared to a non-GAAP number of 58 cents a from a prior year perspective, and so down eight cents.
Or 13.8% as I look at those items and kind of work through the piano. The same could be said on a non-GAAP basis, we did have a decent increasing gross margin, 3.6%, but again the increases enogen a property taxes interest expense and income taxes were more than more than offset doesn't.
Prudence in gross margin I wouldn't say again, though that difference of eight cents a it just didnt tax adjustment alone a seven cents of.
Really turning up to the tax return a good could explain away the difference on a year over year basis.
Moving on to summary financial results in the next page.
Gross margin I should get from a total amount net income was 142.1 million are up 11.6 or 8.9% on a year to date basis primary result, there's improvement in gross margin 11.4 million, we did have higher our operating expenses on a year to date basis.
Higher interest expense and other income, but we did have a sizable tax benefit in the second quarter.
Netting in the net improvement 11.6 million on a year over year basis through the first nine months of the year.
We also showed that our non-GAAP basis.
This case a this year last year of course, we had oh the favorable weather adjustment in this case on a year to date basis and then in 2019, if we remove the tax benefit we I spoke about earlier in 2018 removed the QF benefit that we received and a net net basis, we would be year to date through 29.
In 2024 cents.
2032 cents.
Reduction of eight cents a year to date basis as well reason, we wanted to share with you. The nine months information as well, we typically don't do that in the quarter is we are initiating our guidance.
Through 20 for Four Q2 019, and I think as as a result of.
The news today in terms of its commission are proving the stipulation and a the fact that.
You know it in essence, that's where we can really talk about 2020, yeah. That's very helpful. For you guys have 19 2019 as a base.
Well I'll walk through that very quickly for you here and to be clear I will speak more to this at the.
In the coming weeks, we start obviously at 20 eighteens non-GAAP adjusted EPS. The 3039 cents. When you take a you know kind of the low end in the high end of those anticipated changes.
You'd add two cents, an all end and 12 cents and the high end now you get to 341 to 351, however, with the share count dilution of three cents in either case as a result on a year over year basis in terms of equity issuance that took place last year, we actually show an ultimate range for 2019.
$3.38 to $3.48 clear to say that.
And our assumptions values assumes normal weather the remainder of the year.
And then obviously, we'll get a final settlement.
Final order from the Commission.
But it's good news and that the stipulations approved.
We also have an income tax rate range of zero to 5%.
And now diluted shares outstanding approximately 50.7.
At the ended the year, it's important to point out on this call.
And particularly as we prepare to talk to you, but about 2020 at E. on a couple of weeks to remind investors that we are continue to stay focused on our target a long term, 6% to 9% total return to our investors through a combination of earnings growth and dividend yield and again will speak more that at E. R. Certainly.
The as we talked about 2020.
Commit to try and achieve those as well, but it's also encouraging and Bob will speak to this more about our ability to add more resources to our capital plan and the good news about our South Dakota resources will talk about a moment.
If we if you think about 2019, how do we achieve that range. If you know that go the next page $3.38 to $3.48 in order and the fourth quarter, that's require us to have $1.14 to $1.24.
The midpoint of $1.19 you compare that with a dollar seven in the fourth quarter last year, it looks like or a and b lift, but I'd like to.
Lets you know that from our perspective, we expect to see expenses to be down a bit in the fourth quarter versus last year and I think that's going to be a primary driver to help us achieve those numbers.
Lastly, I'd say, we're again, we'll speak to more clarity around all of this ad.
And with that I'll pass it over to Bob. Thank you, Brian well since we're in South Dakota, let's start with the South Dakota electricity supply plan. A plan was published fall of 2018 focused on modernization of our fleet to improve reliability and flexibility.
And particularly to maintain.
Our compliance and the southwest power pool, and then lower overall operating costs. The plant identified 90 megawatts of existing generation that needed to be retired and replaced over about 10 years on April 15th we issued an RFP for 60 megawatts, a flexible capacity resources to be.
Good and serving our South Dakota customers at the end of 2021.
Lets or a competitive solicitation process, and we anticipate now being able to construct and own natural gas fired reciprocating internal combustion engines are rice units at a brownfield site injure on South Dakota.
It's dependent on a selection of the manufacturers technology, but we anticipate about 55 to 60 megawatts of new capacity to be online by late 2021, a total investment of right around $80 million and the selective proposal is of course subject to execution of construction contracts and then uptake.
Turning the applicable environmental and construction related permits are that gets very very good news.
For continued great service to our customers in South Dakota, certainly we're excited about about the opportunity to to refresh our fleets or you're in South Dakota.
Turning to the Montana electricity supply plan that was ultimately submitted to the Montana Commission in August of 2019.
They will be holding to public meetings, one of the afternoon. One in the evening on December nine to.
Receive any further comments on the plan that plan supports the goal of developing resources to address the really dramatically change and when energy landscape in Montana, but really around.
The west and to meet our customers electricity needs in a reliable and affordable manner and the the real vulnerability in Montana and in the West is at peak. So currently were short 630 megawatts.
At peak, we procure that in the market and that is an increasingly scarce and expensive.
Product.
Forecasted or energy portfolio was going to be about 725 megawatts short by 2025 forget in Montana.
And considering the expert the expiration of contracts and a modest increase in customer demands with it looks at appropriate I probably conservative forecast.
We plan to solicit competitive all source proposals later this year for peak capacity to be available for commercial operation.
Early 20 to 23, we expect to use independent evaluator to administer the the solicitation.
To evaluate proposals and we expect the process will be.
Repeated in subsequent years to provide a resource adequate energy and capacity portfolio by 2025, and the process will of course specify the the need to be met but we'll be resource or specific both demand side and so.
Fly site.
And there's a potential capital spend again of course, depending on the outcome.
<unk> process.
Of up to 200 million or so over over five years.
Other key matters starting in Montana in May we reached a settlement and our Montana electric rate case that would result in an annual increase.
To electric revenue of about six and a half million that's based on a nine point.
Six five return on equity and the capital structure as filed.
And also at 9 million dollar decrease in depreciation expense your installed and May briefing was completed in late August and September a staff memo a recommended approval of the settlement and then as you've heard today.
There was a vote on to a important components.
Of the overall case, particularly a five zero vote to approve the revenue requirements stipulation and five zero vote to approve the green tariffs that stipulation ultimately there are other significant issues for the commission to address and subsequent.
Work sessions and the intention is to issue a final order in the case by December 26, So obviously, we're very.
I'm pleased with that outcome.
Legislatively the.
Primary focus has been on implementation.
2019, Montana legislation that revised the electricity cost recoveries statute.
To prohibit a dead bad central require 100% recovery of qualifying facility purchases.
At a 90% customer, 10% shareholder sharing of costs above or below a baseline. So this is.
Follow on Legislative action to a essentially correct.
[noise], Montana Commission implementation of previous.
Legislation, we view this as a relatively.
Straightforward matter should be a straight forward matter and the commission that is located.
At implementation now.
Next we do continue to invest in our transmission and distribution infrastructure really across the company electric and gas, we're well into a comprehensive infrastructure program focused on safety capacity reliability on the natural gas side investment is particularly.
Driven by by safety requirements, and then also grid modernization is a primary focus I'm looking at advance distribution management.
And advanced meter in fact, as we conclude the metering deployment there my deployment in South Dakota, and Nebraska, We do plan to begin the deployment.
Montana next year.
We are well underway with plans to join the Western energy imbalance market targeting April 2021, and a based on certainly what we've seen and.
SPP with a more complete market as well as our analysis or the western market. We do believe that could mean lower energy costs for Montana customers more efficient use of renewal renewables and greater.
Power grid reliability.
As.
Brian mentioned, we continue to monitor costs labor benefits and property taxes, we are recognized as one of the most efficient operators in the sector certainly among our peer group.
End of.
Made expenditures on some I look we vicar, especially important item.
Over the last year.
Turning to our capital investment forecast up.
As you know, we give a Ah hey, a five year look.
Really by.
Business segment.
Focus on.
Projects that are are known and identifiable based on what's depicted on the on the graph.
We would anticipate funding expenditures with a combination of cash flows.
Aided by until Wells, and then long term debt issuances, obviously with the.
A successful conclusion of the RFP, we could add to that it's about a 20.
A million dollar expenditure are probably 40 million dollar expenditure.
On the first a portion of the.
Supply investment and in addition to that Oh, the Hey am I investments in Montana, So essentially our capital plan.
Going into next year is right around.
$400 million nuts.
Something we're very excited to take on.
The last thing.
I will say is we did announce the addition of to a new board members. This is part of really their ongoing a board renewal and I think many of you have met.
Our board members.
We are proud of the governance that are that they provide an or governance is recognized again really is best in class.
My boss Yazdi will be joining us.
In December She's got just an extraordinary record.
Starting out with the Edison the Companys 38 years of experience.
Focused on strategy technology. This is just oh.
Wonderful person, that's going to add an awful lot to the board I imagine most of you know Jeff you anyway is currently a senior advisor.
In investment banking for power energy in renewables at Guggenheim. He also has just been extraordinary.
Career working in this industry over 35 years. She was a participant this board meeting a and so everyone management and the board.
Really appreciated the way he jumped in with with both feet and made some real contributions just right throughout the meeting so we could not be.
Happier than to welcome both.
Jeff and my Bosh to the board.
And that's the end of my filibuster.
Except that drive Ryan referred to the a perfect storm of weather and Brian I.
Sounds to me as it were describing it was it was the imperfect store, yes, it perfect stars probably better about.
And with that off of your questions.
Thank you Sir if he would like to ask a question we signaled by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is charged off to allow your signal to reach our equipment again. Please press star one to ask a question well pause for just a moment to allow everyone opportunity to signal for questions.
The first question will come from Michael Weinstein with credit Suisse.
Hi, guys.
Michael.
Hey, I'm just too.
[laughter] make run as a kind of a preview of what what you guys are gonna be talking about it.
You know, we say the rate increased about six and a half billion dollars of the actual revenues coming in.
This year and most of it has actually already float in into results for this year right since April .
And I'm just wondering what you know given given that most of that's already kind of in there and any impacts pretty pretty small relative to the 69% total return target.
You know what kinds of other.
Factors that might help boost earnings growth going into next year to get you to actually you know into that target range.
And Michael this is the only.
Information I'll give before the next couple of weeks, but it's really going to be a combination of two things were not only gonna have as you might expect relatively low growth from a gross margin perspective think of our organic growth, but there will be some organic growth.
From a margin perspective, but we intend and tend to actually decreased expenses.
On a year over year basis in order to achieve that growth rate.
Okay.
I know you said, it's the only thing you're going to say, but its or are there any specific categories of expenses that might be.
We will focus on or.
Well, we'll provide you a nice chart with ranges in a couple of weeks.
Okay, Great Oh wait until then thanks.
Thanks, Mike.
Thank you. Our next question comes from Julien Dumoulin Smith with Bank of America.
Hey, how to good afternoon.
Julien scenario.
Hey, good great all right, let me they may take a second on it that's the by Ken.
So with respect to this cost reduction effort you said in your remarks that a 29 key might otherwise look like a heavy lift but for cost reductions that you're pursuing in fourth quarter. How do you think about the sustainability of those cost reduction and truly is the fourth quarter run rate.
An implicit decline a good way to think about those cost reductions you just alluded to into 20, my am I thinking about that right.
I think it's fair to say that Directionally that'll help but I don't think that'll paint the full picture and I'll stop there Julien.
Got it and can I elaborate can you I can you elaborate on what's driving at least the fourth quarter here in terms of sources.
I think we I would just say that's there's certain the we went after certain expenses we've talked about during the first nine months of the year and we made great progress.
Certainly.
Some of that spend we don't expect same high levels a in the fourth quarter and I think on a year over year basis. They are pretty high spend in the fourth quarter last year, and and I think timings, probably the best way to describe.
Got it alright, actually and then can I if I can ask the at a higher level you talk about the 6% to 9% long term total shareholder return on 2019, how do you frame that into 2020, Oh, you know again, given some of the dynamics that you just alluded to and then more importantly, just over the longer term how do you think about the sort of potentially.
Lumpy nature that given the timing for the next rate case and that might be a back any way to ask you about rate case timing in your jurisdictions.
<unk>.
Good I think well, we'll give you more clarity on that in April as we usually do and we'll talk about all jurisdictions at that time and the timing I think it is fair to say from our perspective that you.
You know in light of the.
Hello, relatively lower organic growth in our business, there's going to be a more frequent rate cases than we've had historically and I'll leave it at that.
That is it fair statement, so perhaps if I can just squeeze another real quickly here as you think about the balance sheet side of the ledger and you've alluded to some of the South Dakota Capex here.
How do you how should we think about incremental financing needs et cetera, just again high level I know that we're going to get some more capex details here in a little bit, but at least kinda preliminarily and maybe even specifically South Dakota.
I would say that we did say and then Bob alluded to that the fact that in our capital plans. Our current plan as you see in our 10-K and we'd Sean and this document as well, we do not need equity to finance that as we add generation and approximately 80 million of incremental generation will have pressure and will.
We'll be focused on our FFO to debt coverages and we want to make sure we maintain our triple B flat ratings and as a result, we may have to issue equity in order to finance that incremental growth. So we're keeping an eye on that my expectation is if we were to do anything like that you might utilized.
And ATM or some other means like an ATM program to to finance that and that in light of the fact that this is going to take two years to build the timing of when you would do that is certainly not something we would contemplate today, but maybe later in the in that 2020 or potentially even 2021.
All right I'll leave it there thank you very much.
Thank you. Our next question comes from Brian Russo with Sidoti.
Hi, good afternoon.
Hey, Brian the it's just too just to clarify on the the up 29 T. guns 332.
348 that assumes.
Normal weather for the entire year. So you to date, you're kind of a at a net positive about 10 cents, but that is excluded from the guidance correct. Yeah. I was just stay on a year to date basis, that's already in our we're starting our starting point. If you will is a weather adjusted number already. So then moved assumption is assuming weather for the last quarter as well.
Okay got it and then just on the cost side you today costs are are up.
Quite noticeably not unexpected and I think it's partly due to <unk> pension expense and accelerated tree trimming. So.
Is that something that's going to re occur as we move forward or you know like other utilities for you know industry reasons, I guess have accelerated expenses into 2019, which could.
Alleviate some of those expenses beyond 2019.
Yeah, I would say that's that are vegetation management, it's extremely important to us hazard trees are important.
As well in light of what's happening.
Most of US I think we've made great strides a in terms of accelerating those expenses this year.
Maybe a bit more even than we initially planned and so as a result of that it made great progress, but we'll still have a relatively high span from a vegetation management perspective.
Okay got it and.
Also just to be clear the the assumption in guidance for interim races that beginning April .
First of 2019, so you'll you'll you'll see a lift it for new rates in the first quarter of 2020.
On a year over year basis first quarter 20 versus first COVID-19, yeah. It would be higher in 20 because of rates. We show that go went into effect.
As a result of the stipulation that April 1st of 29.
Okay, So you're going to see the benefit of both the lower depreciation plus.
Or whatever the six and a half and knowing of annualized revenue is in the first quarter.
Only revenue.
Only revenue.
Okay Yeah.
Okay got it and then on the South Dakota, a self built.
What's that the regulatory process.
Believe you're going to need or a rate case too to recover that will just click. They did you see in the meantime.
Yeah, well be looking at regulatory options as there's more definition around the project what I'd say at this point as we've got good.
Communication with the commission throughout the RFP up to the up to the decision but will be.
Making specific regulatory decisions over the coming months and we'll be able to discuss those with you.
Okay. So another option besides the rate case could possibly be a oh rider.
South Dakota has a phased in rate plan statute that was actually originally adopted a to moderate rate says generation was developed and subsequently was extended to electric delivery infrastructure as well, but look at that as an option.
We possibly in conjunction with other approaches.
And when might do you expect to get more clarity on the the ultimate sizes the plant or the cost.
To them forward on the regulatory recovery so.
Right I say by the by the second quarter.
Well I like what did you say I would say February I think we February be we'd have that information, but yeah. I work. This is John Hines, we're looking at no later than mid January at this point in time for final selection contracts signed <unk> got it and then just from an eight if you do see perspective.
We just averaging over the two years or is it couldn't be more front end loaded backend loaded.
I I think for your assumption purposes that sounds like a good way to do it.
Okay and when can we expect comments from the Montana Commission on the supply plan that was filed in late August .
Well, what we know is they are scheduled to public meetings for December nine.
And we don't we don't know what specifically they might do after that.
Okay. So so in that jobs for them they can convey comments.
It's just not for the.
Overseas comments, but we'll be give correct.
And you probably know that we had.
Posted the the draft plan online and set up a vehicle for receiving comments.
Online and then responding to those comments, there as well and all about that as incorporated what we filed with the commission.
Okay, and then are there any brownfield.
Sites available in or around.
The state of Montana.
Oh.
Montana is.
And industrial stage of their fault all kinds of location, but I really don't want to say anything more about what might be.
That is by anyone.
Okay got it thank you very much.
Thanks, Brian .
Thank you. Our next question comes from the deal MRT with Avon capital.
Hi, good afternoon.
Hi, I'm I guess I'm wondering.
What items, there's still outstanding in terms of Ah, the Montana settlement that need to be signed off by the.
Mission I think the items based on the items do well I think articulated earlier I'm not sure whether equity ratio nor are we in some other items or rate base were are still outstanding <unk>. What are the other moving pieces that are still outstanding since they didnt just simply sign off on the entire settlement as.
Post.
But the revenue require and we obviously have to wait to see the specific language and the commission's order, but the vote.
It was five zero to accrue the revenue requirement stipulation.
Five zero to approve the stipulation concerning green pricing. There's also a stipulation pending concerning various policies to promote energy efficiency into alliant energy efficiency investment with the business.
There is the specific proposal from NRDC or a version of decoupling, which we supported.
There is the important issue of.
Ah addressing the.
In truck class Cross subsidy in the current net metering pricing structure and there we in the consumer Council of both proposed.
That the.
Net metering and non net metering portions of the current residential class b separated and that a demand charge. It at some level be established and various other.
Rate design issues, particularly for the residential class that weren't included in the overall rather than a requirement stipulation.
So essentially the a pack that you've had interim rates based on the stipulation would mean as long as these as long as you know the remaining items are.
Approved the consistent then.
Any potential.
No we fund or adjustments is unlikely, but the fact is that the the current rate structure and going through until from now to April one Swiss initiated.
Well is it's consistent.
We really need to see a final order to answer every part of your question I think in in a general sense.
Where we're obviously very pleased with the Commission's action today, and the fact that it was unanimous.
They've laid out a proposal to address the remaining issues, obviously, we'd have a.
Great interest in.
The decisions that are still in front of the commission.
Okay.
What I'm, particularly concerned with those two.
Move towards the situation that better aligns public policy.
With the business plan and without costs are incurred if we can make a few more steps along that path, where I think that would be great, but the decision the commission made today.
Really was key was was important and was constructed.
Okay, and I want my true up not cookies in terms of <unk> December 9th in terms of.
<unk> resource play in the Q.
Provided.
My My recollection is is that that it will simply be accepted as something that would then go through a full process because many of my recollection is that the.
Capacity that you're seeking to have an opportunity to provide to deal with the you resource deficiency you believe exists.
A final decision where.
You you are not sort of all know whether you'd be able to make this capital investments isn't doing it would not be judicate until about this time next year is that correct.
John Roddick why don't you go and speak to that okay.
The the RF or the.
[noise] procurement plan process is what goes through what we call a non contested case process, where the commission will receive comments from external parties. That's what's taking place in public meetings on December nine some point after that they will provide comments on the plan. These are now.
Non binding comments and information on the nature, obviously, we take them into consideration. However, the plan is very specific on the critical need for the replacement of capacity, especially as the Pacific northwest become shorter and shorter and capacity and the roll off.
Colstrip, one and two in Montana, So we will be moving forward with a competitive solicitation process likely at the end of Q4 here in 2019.
And just doesn't turn.
And then that's the after you initiate that solicitation it'll be devaluation of schools patients and then the termination that will hurt where it's about this time next year such that any potential.
Self build options that might that that could help address you know the shortage you see.
<unk>.
No what that you've been chosen or not.
That's correct.
The solicitation does I mentioned will be open to a build transfer to P.P.A. to demand management approach as it will be truly all source, but focused on the identified need as John said.
Process in Montana is.
Non of non Adjudicative in contrast to do some states, but it still is very important process and the commission a will have the opportunity to issue comments as it did on the on the 2015 flat.
Beyond that what I would say is in 2015 met a pretty robust agenda of outcomes from the plan, we were able to move forward on most of those but in.
Hurt because of decisions.
Made by the Montana Commission at that time, and almost unrelated dockets true in terms of symmetry of contract like we had to where the council that RFP.
Which really.
Allowed the capacity hole that were in to discuss that much deeper over the intervening years now since that time there has been.
Oh really almost unanimous appreciation of the situation that we face.
In Montana and in the region entire region is concerned about.
Capacity shortage in fact, there was a regional meeting that a number of his participated in just about a month ago lots of studies have been done.
Part of that obviously has to do with the retirement of existing resources.
For a montana customers the situation is that much more acute.
Both because the peaks or more severe and more sustained ER and because stokes vestiges of supply deregulation.
We have.
We're the only company in the west that has.
A negative reserve margin negative 27%. That's you know so we are we're in a whole we're trying to.
Be responsible and efficient about working with with others in Montana dig it out of the whole.
And to some clear, though I mean, when we come to a couple weeks here Yeah, you know in Florida, and then when you report.
Your rent in February .
The capital program that you know we currently see here.
Bill updates aside from the base program and.
Putting in the South Dakota.
You know a part of Pete you know allocation to you.
There will not be the ability to put in anything relating to your efforts in Montana, because you will simply not have a conclusion, there and that's couldn't be something that would be towards the end towards about this time next year that would be in up to four role for the real forward capital program for you know.
You know come you know sleep 20 for 2021 and beyond.
Yeah, I would say at this maybe do a lot for 2020, we can speak to that with some more clarity at the at IAI for February this when we update our 10-K for a capital plan out for five years do you should not expect to see anything in there for Montana self built we obviously have no idea.
And so they will not be built in our capital plan for that.
Okay, and also I I read something about Oh, you know.
You know someone who's wants to be the chairman of the MPS see who I think seems to like the you know or more.
Oh, you know.
<unk> markets and you know a happening.
Alternative providers for you know you know meeting the generation deficit you guys are seeing or whatever can you kind of speak just too you know kind of how the Americans changes.
Cool is left and it was kind of thought that you know things you know things would be caught he he was the true.
Ah you know a free market type a guy or more like you know wanting to have you know assets built by third parties. How much do you know whether you know how are you seeing things here.
Well there will be several in Montana, several public service Commission elections in some cases, there will be primary this as well as a general a and then ultimately the members of the commission select who the terrorism your reference with somebody running to be chair.
We.
I want everyone who's running for those positions or others running for.
Other office in or service territory to have as much information about the company about our responsibilities are in that jurisdiction as we possibly can so we're eager to provide good factual information specifically as to a supply planning.
The commission is sort of the commissions are really functions of the authority granted them by the legislature number one number.
Number two.
We are using.
Competitive solicitation processes for electric supply planning, both in South Dakota.
And in Montana.
Number three in Montana or there was a.
A comprehensive so electric supply planning statute past Oh with the leadership of another.
Legislator, who is running for the public service Commission and that was legislation that we supported.
Oh, so is the sales much notes wouldn't be happening. This November here in 2019, So we'll have a new composition, that's going to then be evaluating P. M.
The resource plan and the solicitation, that's kind of being developed right now.
No candidates are out are beginning to talk we don't know ultimately.
Who will be running for for what office beyond the folks who have announced they will be primary elections next spring.
And then general elections.
In November of 2020 to take office in January 2021.
Okay.
Thank you very much.
Thank you as a reminder, if you'd like to ask a question. Please press star one now our next question will come from Jonathan Reeder with Wells Fargo.
Hey, Bob and I, just wanted to clarify a one quick thing on the Capex budget in your prepared remarks, Bob did you say you expect to my 400 million next year.
Yeah, we expect our all in capital budget.
Next year, we'll be right around 400 million guests and that's driven by the South Dakota opportunity and then you say am I in Montana.
Yeah. They are the.
Capital that we've been discussing for a number of months, it's pretty robust capital project overall the additions.
Coming out of our board meeting our the generation in South Dakota.
And beginning work on a am I in Montana.
If I could Jonathan just a forever for everybody pretty simple math is if you take 2020 from that schedule of 332 million.
Add.
Approximately 40 million further South Dakota generation and another 25 million for Montana HMI, you're at 397, so in essence that might not be exactly the number for but to bobs point as can be approximately four on.
Yeah like you bring it down like that are simple guy like myself I appreciate it.
Brian If you could you Gotta go through what the miscellaneous items were both you know gross margin in cost wise, but you know really piled up year to date and you know how we should think about those.
I guess going forward or the timing related didn't go away and 2020.
Yeah, I would tell you on the margin front and in both cases unbuilt are the biggest drivers I mean lot of there are quite a few things that add up to the 2.3 for the quarter and the.
2.1, I think for the other if I recall those numbers, but the biggest drivers in each of those cases were on builds that jump up for me on the margin front.
On the on the cost side and they are pretty big others, and I think as a as a company you know we made some conscious decisions in this year to catch up on some expenses and you know a we also had an IR p. process, we had a south Dakota RFP, we had some insurance reserves, we had some higher b T costs we've had.
Awesome compliance costs that we had two and these things a as a standalone basis don't add up but Jonathan there's literally about you know.
Two dozen things I could quantify if you want to talk about things that are in the 100000 dollar range and so I'm not going to go through that but I I kind of mentioned, maybe the bigger hitters.
Okay Kids, yeah weighing on the cost side I think it means like over 6 million year to date, which you know that's big number for you guys.
So it sounds like.
For those we should expect bulk could go away you, obviously still have IR Pete costs, well with Montana stuff, but is that kind of fair that that's one of the buckets I guess, we should be thinking about when we look at you know overall cost for next year.
Yeah I again. These are all costs that are under a million that I've just specified and so.
In some of your right are gonna be repeated some from our perspective, we don't expect to see a next year. So I can't really answer that directly Jonathan.
Okay and then my other question, it's just the Lord transmission revenues.
Is that going to be I guess kind of a new normal going forward. Since you said it was related to lower activity into the coal plant.
Yeah, I think it in fairness you know we.
You know a at coal strip some long term contracts have rolled off and we've just seen as result of that we've seen fewer activity.
During the quarter, we have seen yeah, when there's some more variability in pricing that there is some.
You know, there's some more movement, if you will across our alliance, but I I think I I would put it nets contat contacts I don't expect us to see higher waste is a in a 2020.
The thing to add to that the there.
Is.
Renewed interest in developing renewable resources in Montana for export there's an awful lot of activity around that more than we've seen and probably a decade. So we certainly.
I'll come out and want to work with those parties.
Okay. Thanks, Unfortunately had any.
Thanks, Jonathan unforeseen as well.
Thank you. Our next question comes from the do Liberty with Aspen capital.
Hi, just a couple other little you know polyps here can you remind me I'm you know a leased a historically or what we should do in terms of up maybe the current oh wait to population.
There's always like a structural lag in terms of items that are.
Alluded in terms of relative to the or are we that's underlying things can you remind US you know you know dollar value in the <unk> basis points, that's usually tied to that.
We do I'm not I'm not sure if I'm. Following your question have you getting had generally had lag as a whole or Oh look for instance, so just like to historically if you if you're if you're under your normal operations. If your I'm going to make up number let's say you're earning your authorizes nine five my recollection is it's like there's usually a 70.
Or 80 basis points structural lag because their expenses that simply are not granted that would then effectively turn in nine five in 2008 788 or whatever yeah. I just think I don't have I don't know what that would be it's my expectation that that is a pretty.
A small delta, but I don't know for sure you're talking about things like stock based compensation for yeah, yeah, exactly in <unk> and <unk>, Charles <unk> <unk>, but there's always certain things it seems like that's always there.
And that would be the case, but again as Brad said pretty small.
Okay. I'm also looking at T.D.D. today, it's like on annualized basis current run rate, that's looking like about hundred and 75 million. So if I'm thinking about that persist capex. If she is that basically can be like oh fairly reasonable going forward and put some modest increases or are there any <unk> makes too.
And just how should we think about with TD now.
I think we might be able to share some more light on that Eddie I, but I.
[noise] [noise], alright, and one last thing you are given the cost and issues you're you're you you discussed earlier and a that you're just trying to get a great stipulation approved.
There is there any is there any reason to think that you'll file immediately this year or do you feel like the cost initiatives them, having stipulation can at least by you years. So you can a wait and see what happens with some of the RF piece and then contemplate a a potentially filing you know.
Yeah, I might've missed that are earlier on the call. The do a lot, but I mentioned that we would talk about any particular.
Rate case filings in April , but that's that's our normal cadence will speak to all jurisdictions at that time.
Okay. Thank you very much.
Thank you as a final reminder, please press star one at this time, if you would like to ask a question.
Again that a star one if he would like to ask a question.
There I'm currently showing no further questions I'd now like to turn it back over to management for closing remarks.
Okay, great well again, thank you all very much a it was up low teens today across South Dakota and below zero.
In Montana, So that's yet another reason, we're looking forward to see you all.
Disneyworld and a couple of weeks [laughter].
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.