Q3 2020 NorthWestern Corp Earnings Call

Thanks, Bob. One thing you should consider Bob is a snowblower like make a good Christmas gift for you on page for the deck is our our financial results for the quarter was a good quarter. It's nice to see margin was up operating expenses were down other income was up and we had a nice tax benefit for the court resulting in a seven point eight million dollar Improvement in that income or approximately 36% from a diluted EPS perspective $0.58. That was a 16% or 38% in increments for the quarter going to the next page associated with gross margin gross margin was up to a million or approximately 1% If you look at those items and gross margin that have an impact on net income. The one else all focused. My most attention on is the electric retail volumes and demand we did have favorable weather versus the prior-year that Plus customer.

were partially offset by

It's over the impacts and Industrial loads speaking of COVID-19. We did forecast at 2 to 3 million dollar net impact do to lower commercial industrial usage partially offset by increased residential usage. So that was again the biggest driver to for the two point nine million change and gross margin was the impact to Electric retail volumes and demand both those items that didn't impact gross. Margin that are offset elsewhere in the p&l total unfavorable 900,000 for an increase in gross margin of two million moving ahead to whether be pretty brief here versus historic average or we deem normal. We were unfavorable about 600,000 cooler Montana weather more than offset, the warmer South Dakota weather. We we're 5.1 million better on a year-over-year basis, and yep.

Better because we were both warmer in Montana and South Dakota than we were in 2019 moving the operating expenses on page seven operating expenses. We're actually found one point four million or approximately 1% driven by the nice reduction nearly 5% reduction in operating General administrative expenses focusing their, you know, two million reduction employee benefits down just over a million and Hazard trees and labor and nearly that much in generation maintenance were more than enough to offset the 2.4 million increase in uncollectible accounts for the corridor for a net change those items impacting that income of 3.1 million dollars net decrease below those items offset elsewhere in the p&l. They totaled 600,000. So for a net decrease in May of 3.7 million back to

And I'm flexible accounts. I was partially offset by other program added expense items that were about 1.2 million lower. I'll give a full p&l impact here in a moment. I'm also in the operating expense side. We did see an increase in property tax increase in depreciation expense primarily due to increase plant additions.

The next page operating to net on page 8 operating income pop about 3.3 million or 7% below that we had flat interest expense off a nice Improvement. In other income primarily due to for a a pre-tax benefit of 4.6 million or nearly 21% and below that we had a 3.3 million favorable year-over-year tax item, which netted then a 7.8 million or 36% Improvement in net income dead.

Speaking of income taxes on page nine the bottom of the page you'll see in the first for the 3 months ended September Thirty twenty twenty. We had a 2.7 million dollar benefit package. That was a 3.3 million improvement over the prior year. We had better flow through repairs better production tax credits and our prior permanent return to accrual adjustment was better on a year-over-year basis those more than offset, the the tax item associated with higher pre-tax income moving forward on the balance sheet really not much to report here now a life changes, but the bottom of the page we focus on debt to cap expected change you'd see during the year in September versus a year-end number as well within our 50 to 55% debt to cap off and cash flow on page eleven $69 Improvement in cash flow primarily driven by an improvement in working capital loan.

That is primarily.

By improved supply cost recovery and then you might recall in 2019. We had uh tcga refunds that we gave the customers. Those are the biggest drivers on a year-over-year basis and work in capital that Improvement of ninety-seven million Improvement and work in capitals offset to a great extent by the reduction in net income on a year-to-date basis for then again, the net sixty nine million Improvement that increase in operating cash flow allowed us to invest approximately forty million more in pp&e for the first nine months and we continue to be accelerating Capital program and a cat nice incremental cash will certainly helpful in that regard moving on to page 12 is our adjusted non-gaap earnings for the third quarter the bottom of the page wage. You see a diluted EPS on a gaap basis of $0.58. We did add back one sent the $0.59 for the quarter.

That compares to a fifty cent 2019 3 months ended September Thirty that was adjusted for unfavorable weather as well. So $0.59 vs 50 or a 9 a second Improvement on a non-gaap basis 18% Very nice for the quarter. If you look in the middle column the non-gaap variances comparing non-gaap year-over-year gross margins stock down, which makes sense when you back out the favorable weather and you think about cold but you think about some of the industrial impacts, but that was more than offset by the Improvement biog and a and the Improvement in income tax for the quarter for a net Improvement again on a non-gaap basis a 3.9 million or 15% turning the next page on our food and earnings-per-share Thursday. We affirm our previously revised earnings guidance at 3:30 to 3:45 per diluted share we do. I'll mention a highlighted here to of the Assumption.

We have continued to see COVID-19 packed our business and gets manageable and and certainly to hit our guidance if we're somehow wrong in terms of those assumptions that could impact our guidance. Certainly. We also expect regular recovery of COVID-19 related uncollectible account expense and looking forward to seeing the final order from the Montana Commission on that topic should also point near the bottom of the page. We did I guess back away from the 69% total shareholder return and light of a a very attractive dividend yield close to 5% is we felt it more important to switch to a long-term earnings growth rate 3 to 6, % will granted that that's a pretty wide range but I think folks know we have to in order to get recovery of our invested Capital we need to go in for a cases that can result in lumpy results, but it's also has a at the high end of that range if we're able to execute on our generation birth.

We feel confident we can achieve that higher under that end of that range in light of that. I would say from a t s our perspective if in fact we felt the long-term range if if you will from a dividend yield perspective was a 4% I would argue that are tsrs. Probably more seven to 10% going forward and I also would say we're getting quite a few questions. I could talk about long-term earnings per share. What is your base year when I'd say on that regard is think of twenty-twenty as a base year, but also think of since 2020 was impacted significantly off by COVID-19. Certainly in that regard. So again, the three to 6% is a long-term rate, but up from a base your life for using 2020 as a base year. We should do better than 3%

moving forward

Page 14. We did update our earnings Bridge. We had quite a bit of continued COVID-19 packed in the the third quarter, excuse us and we expect continued into the fourth quarter as a result. We did reduce our expectations from gross margin by $0.08. But we as we pointed out in the last quarter we do offer expect to continue to if that's the case to stay focused on cost control and we do expect some recovery. They're from an OG and expense perspective in from income taxes that are to offset that off. That's the far-right. You can see on that page to the far left. We do still are actual q12 Q3. We've done a nice job from an OG and expense perspective offset gross margin, but you can see why we needed to revise earnings guidance. If you will to the first three quarters, we certainly didn't weren't able to able to do enough to offset property tax depreciation and interest expense dead.

So behind $0.17 on a year-over-year basis through the first three quarters are forecast for the fourth quarters in the middle of that page and you might be curious as to why we think wage to eight to fourteen cents and gross margin in the fourth quarter. Well one thing to point out is two lines below that as property and other tax expense. We did have a favorable adjustment in the fourth quarter of last year and thus we have headwinds of you know, ten to eleven cents a property taxes this year. Remember we do get recovery of that in our track or 75% So that is an ad marching up above. We also mentioned an earlier calls about unbilled timing should have a favorable impact on our fourth-quarter results as well. Those two favorable items will be off-set to a degree off of it in the fourth quarter. We also point out an improvement of six to nine cents from OG and as you can see in Q2 and Q3, we were able to achieve eighteen cents. We feel confident we can continue wage.

At that high level of cost control, I mentioned property taxes and lastly incremental tax benefit. I did talk about timing. And also I think people understand the fourth quarter is a large earnings off for us on a proportionate basis. We get a lot of our favorable tax attributes and proportionate to our earnings. So we do expect some favorable Improvement in the fourth quarter there as well turn off next page Covidien packs on margin expectations. We were really good at forecasting the second quarter not so good on the third quarter, but we weren't very good on resume either and we did quite a bit better on the residential side worse on the commercial and significantly worse on Industrial. I point out the the big reduction in industrial though were two Choice customer's service operators. They're primarily their choice customers invested their bills primarily made up of demand charges. So less of an impact from an earnings perspective for us and birth.

Of the the two million dollar impact mentioned associated with Industrials.

Forecast little bit higher in residential a little bit worse on Commercial and certainly industrial. We do expect one of those large industrial customers back online in the fourth quarter. Again, we will continue to be focused on expense control the offset impacts of covet

moving forward on the expense expectation expect expenses where it pretty much in line with our expectations associated with COVID-19.

Right. Thank you very much. We'll start with the capital forecast and you've seen versions of this over the last few quarters. And here we reflect 1.8 billion of total Capital over the next five years will provide just a little bit more color on that but we anticipate financing with a combination of cash from operation page First Mortgage bonds and Equity issuance as we discussed we expect the issue equity in 2021. And the goal of that of course is to maintain and protect our current credit ratings as we balance that with our Capital needs and plans. This is a a great long-term capital projects. It does include as reflected in the chart eighty million dollars of incremental capital for South Dakota generation between twenty and Twenty-One wage.

Not include investment necessary to identify to to address other identified generation capacity issues particularly in Montana and these good increase the capital forecast. Notably at this week's meeting the board of directors approved going forward with needed generation at Aberdeen South thousand Capital between 21 and 23 have about 65 million dollars total. This is an important investment. We're very excited that the board has long supported that we're really still finalizing our our Capital program right now. We've got a a robust Capital process focused on the projects with the with the greatest value on our system sequencing the projects prioritizing them and and coordinating them.

and let's

The fourth quarter we are forecasting a slightly different than our original.

Significant is in addition to the supply means that there tends to be quite a focus on uh, we will be investing substantial amounts in really all aspects of the business office. And this has to do with ensuring reliability. But also the long-term modernization of the delivery networks will be talking to you off or a t i for example as our as our Capital plans develop, but it really is very very exciting or a couple of other items and I expect will come back and change.

Talk more about these we did request accounting orders in Montana and South Dakota allowing us to defer uncooperative political accounts associated with covet the South Dakota commission issue in order in August authorizing deferral costs for possible recovery and future rate cases Montana commission held a Works package in October. We expect to receive a final order from the Montana Commission in the coming weeks. As you know, in the last month a rate case the Montana commission did approve a pilot fixed cost recovery mechanism, and then it's coded said and we did request the commission to the way that pilot for one year so that it would start July of 2021 and the commission granted that request. We have the compagni.

Cirque

rape case for a Montana for jurisdictional transmission assets pending. We are well into settlement discussions there in that case is resolved and we would file a complaint filing with the Montana commission and adjusting for credit in our Montana retail rates. Obviously, you're following the proceedings associated with our agreement with Puget Sound Energy to purchase their share of close to the floor. As you know, the towel and exercised Its Right of first refusal. So at this point the focus is on the remaining ninety two point five megawatts of coal strip. There are parallel project didn't have the Washington utility and Transportation Commission and the Montana commission bit of an update their the WTC issued an order yesterday suspended.

business to be hearing it had been scheduled for November 23rd, and there will be a status conference concerning the docket on October 29th of each year requests submit filings or recovery of electric natural gas and in Montana for property taxes, the commission's review these trackers and make their determinations based on either statute or a determination and inevitably we have a docket spending they're turning to

Resource planning to talk about some of these projects already in South Dakota construction is already underway on sixty megawatt flexible reciprocating internal combustion engine a nice to be online late, 2021 and construction costs will be about eighty million dollars concerning the Montana RFP initial bids were submitted earlier this year. We're looking for 280 megawatts through a competitive solicitation and off the movie made that is essentially a blind process to us. So we do not know the the outcome of the of the wage ground we have submitted or I should say about half its have been submitted proposing long-duration flexible flexible capacity wage.

Excess of two hundred megawatts little bits like all the others are being evaluated by the third party and we expect that successful projects, uh to be selected at a month by the first quarter and to meet our customers needs be online by 2023. As I mentioned. We continue very robust investment programs in transmission and distribution those include course the the basics that also really accelerating the evolution of our delivery system particularly on the on the distribution side where reader well into a multi-phase process to stand up and distribution operations center where else we're already seeing benefits in terms of of just visibility into the network, uh, and and also moving ahead with automation at the substation off.

We are moving towards we've completed the am I?

Deployment in the electric parts of our South Dakota and Nebraska Network and we will be moving ahead with a my deployment now in Montana as well. We're also on schedule to enter the Western energy balance Market in April and from experience in an spp. We're certainly encouraging this could mean lower energy costs for Montana customers more efficient use of Renewables and greater power grid reliability. I've highlighted this before as well, but I really just as important as going into the eim is a work in the Northwest with the Northwest power pool on Regional resource adequacy and there.

The goal is to really get a a common tool to to measure resources to assign capacity values and ultimately to determine as a region as well as at the company level what our resource adequacy position is and leave without we can open the call for questions and discussion.

if you

Would like to ask a question. You may press star one now on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off. So allow your signal to reach our club. If at any point, you would like to remove yourself from the queue. You may press star to again, please press star one to ask the questions. We will take our first question from Michael Weinberg of Credit Suisse. Hi guys. Could you give a little more I guess color on what your thoughts of a fourth-quarter, assuming, you know for COVID-19 and you know in order to make guidance, they you know, how much extra savings do you have to come up with in order to offset off your latest expectations? Yeah. I think the bridge Mike try to give an idea. The reason for the gross margin change on the bridge.

Of eight cents really is the answer to that question. We looked at kind of how things were trending in Q3 expectation is we certainly see it in our service territory is here certainly more so than we forecasted way way back in April. So I would argue that's the best place to capture that is in the office the eight cents there. And do you answer your question how we going to offset that $0.03 incremental o g and a savings or cents more taxes and then everything else and that's for another penny.

And usually the taxes will come through I mean o g n a i can see having more control over but do you have that kind of control over the tax breaks? We we certainly I mentioned the attributes. I have an idea in terms of expectations on fourth-quarter based upon our pretax income during the quarter. We also had a favorable third-quarter adjustment and so from that we net Netflix, we feel comfortable with the fourth quarter with the eight to twelve cents. Is there any color you can

Gotcha. Is there any color you can share on the on the docket for cost recovery that I guess I think I heard you say it would be another couple of weeks. We'll get a decision, Montana.

The condition of the work I shouldn't a couple of weeks ago actually did because they were concerned to get it out the door gave staff directory to issue a notice of commission action improving our ability to issue an account for anything on the retirement on the pension funding in terms of the COVID-19 expenses the discussion by the Commissioners was was very very favorable sympathetic one commissioner made the comment that maybe we should have asked for more than just recovery of the incremental bad debt, but because there wasn't a wrong direction to staff to just issue it and see a really do have to see the language in the order before our accounting department gets comfortable with them.

Making a decision, right?

We're very waited with bated breath for the accounting Order. Final quarter has written.

Not just see currently. It's about $0.09 of guidance. Right I think is relying on getting that cost referral.

You're saying COVID-19 for September 30th. Accounting around $0.09.

Yeah, that's your right for two two and two or three if you had those UPS about 9 since we expected we're going to get some recovery. If you will during the fourth quarter, we are disconnecting for non-payment during this time. Right. Now that's reducing that total and thus the net reg asset that we record we expected to be around $0.05. Not not the $0.09. Okay, God I got you. All right and is I guess when?

Are there any any updates you can give on the RFP? I guess your your your expect successful projects to be selected announced by first quarter of 21 to begin on page twenty-three, you know, is there any additional color on that? Any any reason to that you might have to wait longer? Let's say then first quarter wage. I don't think we'll have to wait longer commitment made is if we here that are that are projects don't make it into the next round off like, you know about about that. I've been quoting the the Jazz standard and nothing until you hear from me.

So far, we haven't heard anything. We take that as positive it one final question. Maybe you just talk about the election coming up and how what what we should be looking for the commission thoughts. I things are shaping up.

There's an election coming up. There are three open seats one incumbent in Billings is running for re-election off of the incumbents lake and Koopman are turned out uh-uh. And the campaigns are extremely extremely active. There's no I'm pulling result public polling on Public Service Commission races will all be eager to see the the outcomes what you heard me say probably every two years is

Regardless of who's elected we're very very eager to begin really taking them as deep as they're willing to go back to our operations in our obligations to to serve our our customers and their constituents and the reality of the jobs is just took an incredible amount to learn and in fact really their opportunities, I think for both the equity side and the credit ratings agencies to help them with that educational process because what we do is invest in critical infrastructure and provide essential service, we can't do that with the confidence and support on both Equity investors. But in terms of where the commission elections are are likely to go I would really hesitate to make any purchase.

I guess one final question on that. Same thing is Colstrip in a a part of the election conversation or the campaigning at all. Is it?

I'm sure that it has it certainly doesn't mean you're talking about PSC races.

There is lots of discussion around certain environmental issues things like that. I couldn't point to specific comments around Colstrip one way or the other and of course, there's the potential that anyone is elected is is going to be asked to make decisions around close trips to like The Prudent candidate would want to be careful about making any overly prescriptive statements.

All right. Thank you very much.

Thank you, and we will take our next question from Julian Smith of Bank of America.

Good afternoon. This is actually Brian Greenwald on for Julian Ryan.

I appreciate you taking our questions.

You guys provide some clarity on how you're thinking about the timing of equity in the next year. Now. I know at one point you guys were saying late this year early next year, but just curious how your thoughts have evolved there in terms of potentially mitigating dilution for 20 21 and await resolution on bad debt recovery in Montana is the outcome. They're going to influence how you guys are thinking about it and the magnitude actually Ryan one thing that's going to really drive the magnitude is whether we're successful or not on the RFP and and we'll be we hope to be talking about the size of an equity that will need in the February April timetable and

And we certainly feel comfortable going into twenty Twenty-One, but that'll be about the time. You hear something from us on that.

Are you able to provide any color just in terms of like thinking about potential upside to cap back into EDI and Beyond in terms of financing in terms of sense on incremental. You know, we got to have something to get you excited to meet with us in three weeks there enough money to travel to the meeting.

In terms of the further acceleration of cost at this year. How would you frame o&m in the 21 and timing of potential future rate cases given the historical test here?

I would say that should we have well speak to kind of our thoughts on Twenty One in three weeks to but I have to tell you the company continues to be extremely phone no cost control heading into this year. We did better than we anticipated to do and a lot of those things will continue into 21.

Great appreciate the time. Thank you. We will take our next question from SAR of Google home partners.

Involving Brian. Hey, how you doing? Good a couple of quick questions here just on the newly initiated earnings growth, right just curious sort of like how you frame the top end, you know, you you guys have talked about sort of being really comfortable with sort of that bass spend run rate being around 400 million dollars a year. So does that top-end include sort of the backfilling of the current capex trajectory? And then so how do we also think about Montana generation spend which could obviously as you've reached $200 million. So is that sort of incremental to the 6% that you did you just initiated? I would say this again depends on how successful we are a walk-in are pays, but I would put it in this context if we're able to as you point out get timely recovery on a $400 million home.

Investment in each of those years and I'm not saying that's exactly what it's going to be but we should be more like in line with the middle of that range. I'm saying if we're successful from an Irish perspective, we certainly should be at the top end of the range and it depends on how much investment there is and and and and the time the recovery, is it possible to do better? I I imagine it is but I think we're comfortable with that 3 to 6 % got it and then just can you just remind us just on on the equity question and obviously we're waiting for it. But we're you as far as the protected and unprotected added refunds and you know under the assumption that you may see higher corporate taxes can that mitigate sort of some of your incremental Equity needs that that were still some disclosure on so I guess how do we sort of think about the interplay between potential higher corporate taxes and and your Equity needs and kind of where you are as far as the refunds of the attic?

Obviously, it's Bob pointed out there is election going on. And and we we all know that tcja had a tremendous impact on a company's from an equity perspective. We we have not contemplated anything from an election perspective into our plans from an equity raise. We're looking at status quo at this point in time. I would expect again with timely recovery much like we did timely recovery had timely recovery when we had to pay refunds to our customers, obviously an increase in the tax rate ultimately is going to be beneficial to us from a cash flow perspective. And so, you know, will we have to we'll also have that information around that February April timetable how to think about that as well.

Got it.

Got it. And then just just lastly, you know with you joining eim. And and we've seen some of the some of the companies that I've joined the I am the sort of the bill savings that you're getting a result of it, right the Headroom some some of the utilities have been able to pull forward some capex given sort of the balance sheet given sort of the bill Headroom that you've gotten as being part of the month. Have you sort of Quantified sort of what potential savings you could see as you join the eim and if you have additional Bill Headroom as a result of em, could you age for some additional spending opportunities similar to what we've seen with some of the other sort of members, you know, that's that's not the way I would look at the imbalance mom at least near term and honestly we have not used the phrase.

Bill Headroom in the context of either Cal ISO or which is a complete Market. We have seen wage substantial Supply savings to our customers. But in order to get the full benefits of STP we have that has has certainly been another Factor supporting are retired and replaced approach to our oldest Assets in South Dakota in terms of moving, Montana.

Into the we were later than some of the other Western companies. We you know, we sit on the Eastern edge of the the Western interconnect because we needed to get comfortable that there was a a positive return benefit for our customers from moving forward as the Western Market developed wage could we could see that but again in the eim, it's a it's not a capacity Market. It's a neutral our market and we need to have resources that dispatch in order to to fully participate. I think the longer-term benefits will depend on how that Western Market evolves wage, but certainly believe there will be savings and other benefits as well for moving into eim, but we we don't anticipate anything that would be dead.

Look like a step change and then you have to factor in other considerations moving in the opposite direction such as Brian was just discussing a a substantial change in in central tax policy.

I think it's fair to say as that market does develop and if it becomes a fully functioning market like s p p i mean we have seen them to 7% Improvement for customers bills participating in that market and I think that's ultimately where we'll get to and I agree that will provide Headroom but Bob about lot of reasons we want to participate in any that ultimately would be one as well. It's not that much longer proposition as we looked at the beginning I am we we very much wanted to be part of the the longer-term development of that market.

Got it.

Perfect. Thank you guys appreciate it and congrats.

Thank you, and we will take our next question from Chris Ellen House of Seibert Williams.

Hey guys, how are you? Hey, Chris, Brian as far as the incremental, you know estimated that that expense from COVID-19. Is that one hundred percent offered at this point?

No, no not. No, it's we're booking at bad debt expense as we normally would we did have a slight adjustment for South Dakota in the third quarter, but we're hopeful on the fourth quarter depending again on the accounting order to have an adjustment at that time. Once again, we see the final order. Okay, that's what that's what I want to Clarion. Okay. So in the fourth quarter pending pending the order in a couple of weeks that benefit can flow through in the fourth quarter, correct, correct. And as I pointed out also Chris this earlier on Thursday just to avoid confusion. We've mentioned five cents in the past. And if you argue today, it's $0.09. But again, we have been and certainly seen benefits of my system with Dakota. We've had ability from disconnect for non-payment to capture some of that incremental bad debt, and we're also in in currently right now, ma'am.

In the same in Montana albeit without am I but we're seeing some progress there as well. So unfortunately we run into winter rules and and so the ability to wage disconnect and have the same impact slows here relatively soon. So we've got to continue to work hard at it to try to reduce that amount of bad debt expense as best we can with or without an accounting firm. Right? Well what what I was kind of getting at is just just so that everybody has Clarity that fourth-quarter range, which is a pretty substantive one incorporates both weather and this potential for where the accounting order to be a pretty sizable benefit, right? Yeah, as I said that we bought that is about a $0.05 item and we're expecting to get favorable regulatory treatment in our guides. Just looking at the the capex Dead.

I presume that the drop-off in the natural gas cap x-word years is merely just the imperfect forward with you know, estimate of capital and that's part of what we'll hear about it. We I

Yeah, I think yeah, I'll go ahead Bob right after you Alphonse and Gaston. I just would say this I think you know typically Thursday we have this downward-sloping and sometimes things can change priorities change as well as we move forward in terms of where that Capital spend goes. And we move some things around to fit projects off and but but that's all I have to say. They're okay and I would add just that we do have a robust gas investment program both distribution and really particularly on the transmission side. And there is there are certainly as fall off in the last couple of years, but the averages are still significant course, that's a big it's it's it's not as big a a part of the overall business, but we do have some significant.

in gas transmission Investments coming up and

Visited with the board about those even this week.

All right. I appreciate it.

Thank you, and we now have Brian Russo.

Good afternoon. A lot of my questions we're asking answer but just on the timing of the RFP outcome. Is there a deadline for the winning bidders to be announced? You know by the the independent third-party in the event that it's a self-build scenario to have that generation available in early 23

There isn't a deadline for the announcement. We've been as you know, we extended the open. Forbid submissions, but have been a month old all of the rest of the the date and we were very concerned to get.

Supply available to meet our customers needs just as you said we're we're in the whole not just in 2023. We're in the whole now getting the money for a number of years and we were very concerned about our customers increasing exposure to what we're comfortable with the first quarter, based on what we've seen from from across the wall. We think that'll be doable.

Okay, got it. So even the early 2023 commercial availability. I mean even that somewhat fluid right? It could be mid 2023 or is it time and with maybe you know short-term is rolling off just a little insight there.

Well, there's not a lot of insights to give we we need the capacity resources now and we can 2023 is realistic and not by just point of comparison. If you look across the border to to the east to South Dakota you see how quickly we've been able to go from plan to execution to meet the needs in South Dakota and as important as those needs are we're not facing 45% capacity shortfall of South Dakota by any mean so Thursday, we have a sense of urgency in Montana and we think it would be appropriate for for the state of Montana emergency.

Okay, great and just curious how did the the peak am function in in the third quarter of 2020 when we saw that volatility in the western power markets and walk in August. Just curious, you know, where you above or below the bassline in in rates?

Friday we have a the schedule in the back of our Our Deck that's kind of shows the impacts and it's 36 of the deck in the in their life. We show for The 20/20 Experience is about 400000 to the detriment if you will and on a year-over-year basis, it's $500,000 variance.

Okay. Got it. Thank you.

Thank you. We will take our next question from Jonathan Reader of Wells Fargo.

Hey, Jonathan. Hey, Bob and Brian. How are you? Good. Thanks. God and the final war on I thought in that work session. They had to push some sort of, you know, like 5% Net income threshold before any sort of recovery would be a four-digit is that not the way I guess you've interpreted things or have they changed that opinion? You just kind of update there. That's really what we are waiting to see in in the order of

That's that's what I was going to share.

Right give that 5% that income threshold is withheld or upheld in the border and presumably you won't get that $0.05 recovery, right?

If in fact there's a a a restraint if you will and depending on how that restraints worded, it could have an impact on us recording or Greg acid. That's correct.

And it also depends on how that would be applied is that

In fact, just a bad debt or is it all impacts associated with COVID-19 Jonathan. There's a lot of unknowns yet. And we need to see in that final order them know I I thought they were still some uncertainty there. But yet I misinterpreted Bob's comments that it sounds like everything was really positive. So just wanted to check to to make sure that was still there and then going back home discussion that the commission was extremely positive and there was just some noise around that particular issue. So we're eager to see the order.

Okay, and then back to the the whole thing with coal strip and the the Washington commission suspending they're here. What was kind of the rationale behind that on this yesterday with other merger activity going on?

Really what was going on yesterday? Tell us about that. No, no, no. No. No, I shouldn't I shouldn't have opened that particular wage. Yeah, what had most of you probably following this but in sequence we talked about Cal and asserting it's real for so tall and looked at them and said Gee Northwestern negotiated a very good deal for its customers and for the state we want half of that then in Washington first month commission staff which appears as a party file some testimony critical of The Proposal in a number of ways including saying that

The deal was two favorite.

422 North Western and then another party also filed testimony that was was problematic effect. That was a Vista Home. So based on that then the PSE requested that the schedule be postponed off Washington commission approve that and there will be now a scheduling conference set on the status conference set on the 30th. We were certainly disappointed that Avista chose to participate in the way that it did. I honestly don't know why they did that page and we believe that the transaction.

Would provide real benefits all around and obviously Puget which is a very sophisticated company concluded that it was an important part of its strategy to on the one hand made the Washington State carbon deadline 20-25 while meeting its customers needs between them know and then we believe that it helped fill that hole. We've been discussing on on this call for our customers for a significant period of time. We also believed it really gave the the state of Montana the opportunity to have meaningful control over over this part of its critical infrastructure in provided benefits to to the community and Colstrip. So again big picture, we think the proposal that Puget and we negotiated wage.

Did an awful lot of very important things but the status will likely be determined out in front of the Washington commission and we will all know more in the coming weeks.

Okay. So at this point you think I mean get into Washington approval is obviously key and you know without that there is no way for you to move forward in any form or fashion on Colstrip than God. I guess you would just address the shortfall going again through successive RFP.

Yeah, well, we'll have to make that decision depending on what happens in Washington, but you're right for this deal to go forward there has to be an approval in Montana of course, but they need to be an approval in Washington for the sale of the regulated assets and depending on how that all comes out. We will we will make an evaluation. But at this point we were we were counting on the 92 megawatts to help need our customers needs. We believe there was value in the PPA back to Puget. They would have had the net dedicated towards future remediation costs for our existing ownership share with huge in retaining the responsibility for the what they currently own. So again, there's just a lot of

very very attractive

Pieces to all of this for for both parties and I really believe that if it doesn't go forward, it will be uh, a big loss all around. In fact really a wage loss for the Colstrip owners that aren't direct participants in the transaction, but we'll have to we'll have to evaluate what we do next once we get home already.

All right. No, I appreciate that Clarity and response and look forward to speaking to the Inky.

Thank you. And as a reminder, if you have a question, you may press star one. Now. You have a follow-up question for Michael Weinstein Credit Suisse.

Yeah, I was going to ask a lot of the same questions about Colstrip, but can you I mean, maybe it's just a follow-up to it. I mean can unit 3 operate on its own if if the same metaphor doesn't go through and eventually wind up having to shut unit. Well, let's say can you operate on its own is enough play up there too long.

Yeah, probably the scenario would would be the opposite there's a there's an owner's operating agreement that could both units and there's a reciprocal sharing agreement between the two units but yes, the two units can operate independently in our existing ownership interest in a unit for what we were proposing to purchase is in unit for we don't we don't own any of you the three.

Well, I'm just thinking about I don't know maybe make a comment on the broader region. And you know, what is what does Supply look like across the entire Pacific Northwest over the next few years at what point do you wind up with load overcoming Supply nothing else getting built?

Going forward, you know, when do you want open? Usually? Yeah, that is exactly the reason that we are dead. So bullish on the northwest power pool, uh, the regional resource adequacy work. We are as a region facing those concerns would you do a a kind of a ranking of the the reserves available to all of the companies that operate in the Pacific Northwest? Everybody is a little scared and maybe getting a little bit naked but we are incredibly incredibly exposed and we need we need dispatchable resources to meet off peak. We need resources to help integrate and balance the intermittent resources that continue to come on in in very large.

for each number

And that unfortunately is not what's being built. But that is what is what is being retired another kind of interesting.

Quite a comparison is the California outage is this this summer and if you Travis could include in a future appendix pretty good compared a percent of the resources in Cal I so to the resources on our system and effectively these are rough numbers, but you could say California has probably right now, I'm on a 50% dispatchable resources primarily including natural gas and a relatively surprising a relatively lower percentage of intermittent and Renewables or as we have a very very high percentage of intermittent some non dispatchable resources in a very very low percentage of dispatchable resources. And of course in Montana haven't brought any any of the thermal resources on in about a decade. So for all those reasons, yeah, this is a concern

For the western United States. It is a concern for the Pacific Northwest and it is a bigger concern by far for Montana Thursday. And for any other state in the West.

And and yet this is not an election issue. Right? I mean it's not even being talked about in the legislative election contests. As you know life is awareness. There is there is increased awareness. It's a tough thing to get your arms around their birth, certainly political leaders who understand it and want to help address it but it's it's a tough issue and long-term decisions are very very hard to make. I understand that too. That's what that that's what song electric and gas companies do make long-term decisions, but we can't do that if we don't have support from politicians and policy-makers.

Yeah, just to be clear. You guys are not affected by any of the wildfires yet. Hopefully never but not really affecting your system at all, right?

No, we we have fires virtually every year and we have certainly the the beetle infestations wage things like that. But if you go back to when we started our distribution system infrastructure plan over a decade ago, we always put substantial resources into vegetation management. Now, we have a very aggressive Hazard tree program. We are participating with the other.

From utilities and what you could call kind of a gap analysis, um sharing our our various strategies ugh deciding what strategies that other game companies in the west are using that might make sense for us and and what strategies don't but then been doing slowly. So we we do have fire red osier. We are are focused on it have been for a a very long time. We did have fires this year not on the scale. My name names of what has happened on the coast or largest fire. This year was just north of Bozeman in a I just a very beautiful area. I'd say north and east of of those and then we have other smaller fires as well. Certainly.

But not enough to raise any alarms and you know the legislature of the commission.

Despite the way to California you can point the, California.

We have been briefing the the Montana Commission on the subject for quite a few years and they they do understand it and they do support the expenditures that we're we're making from the vegetation management side to the Investments that we're making in the system. I'm going to get a little bit more details for you. One of the things that we're doing just because our planners have so much data is what we call the electric segment identification program or he said what we're doing is taking the data to identify sub-segments of these very very long lines. We have in much of Montana and then being a the target our work at those lines sub-segments and uh and effectively rebuild those as capital projects by the way, but use our resources is dead.

Efficiently as possible their benefits in terms of fire preparedness or avoidance, but also real benefits in terms of reliability and resilience.

All right. Thanks Bob.

More than you wanted, but thank you for listening. Oh, no, not at all. I'll thank you Brian. I get your point out Bob just We Didn't Start those fires those fires just happen to happen in my life in a correct. Just want to make sure that's clear.

Thank you for a reminder. If you would like to ask a question, please. Press star one now.

Speakers at this time. We have no further questions.

Right, I think you and I talked them into submission mainly me. That's right. Get get up that that's no show a lot of Pop.

Well, thank you very much for joining us. It is too bad, but we're not going to be together in person at the meeting, but I'm sure it's still going to be a great great conference.

Have a great weekend.

Thank you. Ladies and gentlemen for your participation in today's call. You may now disconnect dead dead dead.