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Edited Transcript of NWE earnings conference call or presentation 20-Jul-18 6:00pm GMT

Q2 2018 NorthWestern Corp Earnings Call

Sioux Falls Jul 23, 2018 (Thomson StreetEvents) -- Edited Transcript of NorthWestern Corp earnings conference call or presentation Friday, July 20, 2018 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian B. Bird

NorthWestern Corporation - VP & CFO

* Robert C. Rowe

NorthWestern Corporation - President, CEO & Director

* Travis Meyer

NorthWestern Corporation - Director - IR & Corporate Finance

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Conference Call Participants

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* Andrew Levi

* Jonathan Garrett Reeder

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Julien Patrick Dumoulin-Smith

BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research

* Michael Weinstein

Crédit Suisse AG, Research Division - United States Utilities Analyst

* Paul Patterson

Glenrock Associates LLC - Analyst

* Paul Thomas Ridzon

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentleman, thank you for standing by. Welcome to the NorthWestern Corporation Second Quarter 2018 Financial Results Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to your Investor Relations Officer, Mr. Travis Meyer. Please go ahead, sir.

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Travis Meyer, NorthWestern Corporation - Director - IR & Corporate Finance [2]

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Thank you, Catherine. Good afternoon, and thank you for joining NorthWestern's Corporation Financial Results Conference Call and Webcast for the Quarter Ending June 20, 2018. NorthWestern's results have been released and the release is available on our website at northwesternenergy.com. We also released our 10-Q premarket this morning.

On the call with us today are Bob Rowe, President, Chief Executive Officer; Brian Bird, Vice President and Chief Financial Officer; as well as several other members of the management with us in the room today to answer your questions.

Before I turn the call over to for us to begin, please note that the company's press release, this presentation, comments by presenters and responses to your questions may contain forward-looking statements. As such, I will remind you of our safe harbor language. During the course of this presentation, there will be forward-looking statements within the meaning of safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often address our expected future business and financial performance and often contain words such as expects, anticipates, intends, plans, believes, seeks or will. Information in this presentation is based upon our current expectations, our actual future business and financial performance may differ materially and adversely from our expectations expressed in any forward-looking statements. We undertake no obligation to revise or publicly update our forward-looking statements or this presentation for any reason. Although our expectations and beliefs are based on reasonable assumptions, actual results may differ materially. The factors that may affect our results are listed in certain of our press releases and disclosed in the company's Form 10-K and 10-Q, along with other public filings with the SEC.

Following our presentation today, we will open up the phone lines to allow those dialed in to the teleconference to ask questions. The archived replay of today's webcast will be available beginning at 6:00 p.m. Eastern Time and can be found on our website, again, that's northwesternenergy.com, under our Company, Investor Relations, Presentations and Webcasts link. To access the audio replay of our call, dial (888) 203-1112, access code 7508519.

With that, I'll hand it over to Bob to run through the results.

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [3]

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Travis, thank you very much, and thank you, all, for joining us this afternoon. We are in Aberdeen, South Dakota, known as the hub city, and it's a major trading hub in South Dakota. As you know, the partnerships we have with our communities is very important to us, and there is no place that more exemplifies that than Aberdeen. Over the last several days, we had a great community meeting, meeting with our employees this morning, and yesterday, got a chance to see some of the exciting growth and development in Aberdeen. It's trading city, also a real center for what you can think of as industrial and agricultural work, and we're very much a part of that. In fact, our area manager also leads much of the economic development work in the Aberdeen region. So it's been a great several days.

Turning to the board, a number of you know, Steve Adik, who just stepped up as Board Chair, and Linda Sullivan is now the Chair of our Audit Committee, and we continue to have a very strong and constructive Board of Directors. So it has been a good meeting with a lot of good work done.

Turning to highlights for the quarter. Net income increased $22 million or 100.6% as compared to the same period last year, and this increase was primarily due to a gain related to the adjustment of our Qualifying Facilities liability, and Brian will take you much, much deeper into that, along with favorable weather and to a lesser extent, increased demand for electric transmission service. Diluted EPS increased $0.43 or 97.7% as compared to the same period last year. Adjusted non-GAAP earnings per share increased $0.16 or 34% as compared to the same period. And the board declared a quarterly dividend of $0.55 per share payable on September 28 to shareholders of record as of September 14.

And with that, I'll hand it over to Brian to go deep into the financial results.

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Brian B. Bird, NorthWestern Corporation - VP & CFO [4]

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Thanks, Bob. On Slide 4, summary financial results for the second quarter. As Bob pointed out, a net income of $43.8 million, a $22 million or just over 100% improvement quarter-over-quarter from a diluted earnings per share $0.87, a $0.43 or 97 -- approximately 98% improvement again quarter-over-quarter. Quarter was primarily driven by an improvement in gross margin, and I'll get into that more in a minute, $29.7 million improvement, approximately 15%, continue to control cost, particularly in the operating, general and administrative expenses and that led to the results for the quarter.

Speaking gross margin on Page 5, I'll get into the actual specifics. We had $229.6 million of gross margin, that's a $29.7 million or nearly 15% improvement. The primary improvement, particularly in the change in gross margin impacting net income came from a $25.1 million Electric QF, or Qualified Facilities, liability adjustment. I'll speak to that more in a moment. In addition to that, we had good volumetric improvement on a year-over-year basis, retail volumes and electric side up $2.5 million and the gas side up $1.5 million. Continued good use of our electric transmission system, a $1.4 million improvement on the quarter. The primary items, again, moving gross margin that actually impacts net income. We have some things that impact gross margins that are offset elsewhere within the P&L. We had $6.2 million reduction or a decline on a year-over-year basis due to the Tax Cuts and Jobs Act deferral during the quarter. That was offset partially by $3.5 million recovery of property taxes in our trackers. That net change for those items in gross margin are offset elsewhere in the P&L, with minus $2.4 million netting to the $29.7 million increase in consolidated gross margin.

Speaking about the $25.1 million improvement in Qualified Facilities earnings benefit, the reduction in that liability is really broken out into 2 parts. The first part is $17.5 million benefit was resulting from the reduction of an estimated future liability or forward looking -- look at our unrecoverable QF costs. Those out-of-market costs are expected to be $23 million less in on an NPV basis, $17.5 million. And so that reduction in that liability we've actually backed out of our non-GAAP results similar to how we handled the loss from this calculation back in 2015. The other component of the benefit was a $7.6 million benefit due to the annual adjustment to reflect lower actual output and pricing of QF related supply costs, and that was driven largely by outages at 2 of our QF facilities. And due to the annual nature of that adjustment, we have not excluded that from our non-GAAP earnings.

Moving forward on to Page 7, just to speak about weather for a moment. We point out in the red box on that page that we estimate unfavorable weather in the second quarter was $1.4 million unfavorable compared to normal and approximately $0.6 million favorable as compared to the prior year. And speaking as I look at it, especially describe it from my perspective in terms of versus normal, we had unfavorable weather in Montana. It was a bit warmer during our heating months there. Even though, it was a bit colder in South Dakota and Nebraska that helped offset that and it was a bit warmer in South Dakota as we're actually capturing some cooling degree days, but the Montana unfavorable, if you will, versus normal overwhelmed the South Dakota favorable. On -- and you can see that actually on the map to a greater extent, as you look at the weather in Montana, it certainly wasn't cold enough in April and May when we're getting heating degree days, certainly had been -- there's very little load, if you will, from a cooling degree day in Montana. But South Dakota did its part. It was certainly cold in April as you can see, and it was warm in May and June, and we actually had quite a bit of cooling degree days associated with South Dakota. So versus the prior year, the South Dakota favorable actually slightly overwhelmed the Montana unfavorable on a year-over-year basis.

Moving forward, to operating expenses on Page 8. Operating expenses of $160.3 million or a $6.7 million improvement, approximately 4.4% on a year-over-year basis for the second quarter. Operating, general and administrative expenses up $1.2 million or just under 2%, property taxes up $3.5 million or almost 9% and depreciation and depletion up $2 million, almost 5%. If you look at the increase in the OG&A piece, we really look at that in kind of 2 pieces though. When you look at the change in OG&A expenses, actually impact net income, we actually were down $1.9 million on a quarter-over-quarter basis. We did have an increase in employee benefits. We've had higher medical claims than we had the prior year, slightly higher pension cost on a year-over-year basis, primarily drive that. But we did have favorable variances in terms of maintenance costs, lower labor costs, the DSIP program ended in 2017 and some other favorables that helped to keep our cost, from that perspective, those things that impact net down on a year-over-year basis. Those changes in OG&A that actually are offset elsewhere in other income we had from our nonservice cost component, we have an increase in OG&A, that's offset in other income of $2.6 million. And as you know, our nonemployee directors deferred comp impacts both OG&A and other income as well. That was $500,000. The change -- the total of those 2 items was $3.1 million and the net effect of all of that was a $1.2 million increase in operating, general and administrative expenses.

Property taxes are up $3.5 million, as I pointed out earlier, primarily higher plant additions and higher annual estimated property valuations, and depreciation and depletion up $2 million, primarily due to plant additions.

Moving forward, Page 9, on operating and net income. Operating income was $69.2 million, a $22.9 million or nearly 50% improvement. Below that, interest expense was relatively flat on a quarter-over-quarter basis. Other income was an improvement of $1.4 million, primary as a result of things I talked about previously, the decrease in other pension expense and increase in value of deferred shares from the nonemployee director deferred comp basis, both of those were offset a bit by lower capitalization of Allowance for Funds Used During -- or AFUDC purposes. These -- those items lead up to an income before taxes of $46.9 million, a $24.5 million improvement or 109%. Below that, of course, income taxes were up $2.5 million and primarily the result of higher pretax income, offset partially by a lower statutory federal tax rate in 2018.

Speaking of tax -- income tax reconciliation on Page 10. We talked about the increase of $2.5 million. The primary driver for that, as you can see at the top of the page, is the increase in pretax income. And even at a lower rate, we did have a higher increase on the income tax calculated at federal statutory rate. Below that, 3 items also had an impact. The state income benefit is -- was actually $1.3 million less. That's primarily as a result of loss of bonus depreciation. Flow-through repairs was slightly less as well, primarily as a result of lower federal statutory rate. And production tax credits, the benefit actually slightly better as a result of higher pretax that we've had thus far through 2018.

One other point -- thing I'd point out on that page is the effective tax rate for the quarter is 6.6%, but we do anticipate our year-end ETR to be, again, between the 0% to 5% range.

Moving on to the balance sheet. Total assets stayed flat. Property, plant and equipment are up approximately -- just under $100 million. We also see a decline in accounts receivable similar to what you'd see with the seasonality that we have in our business. On the liabilities and equity side, again, relatively flat. Shareholders' equity was up $100 million, think the improved earnings and think of the incremental utilization of our ATM program helping out there, offset by a $100 million reduction in debt. And that activity, as you can see at the bottom of the page, impact our ratio of debt-to-total capitalization now down to 51.1% comfortably in our 50% to 55% range. We'll continue to look at means to delever the company.

Moving forward, from a cash flow perspective on Page 12. We had a $68 million improvement in cash provided by operating activities, primarily due to the higher net income, but also improved collection of customer receipts and increased recovery of certain costs through our supply trackers. An incremental cash flow plus the benefit of the proceeds from the issuance of our common stock allowed us to have bit of an increase in our cash used in investing activities. We did invest in, Two Dot Wind, made an acquisition, small acquisition there, continue to grow generation fleet. We also used an incremental cash, as I noted earlier, to pay down just approximately $100 million of debt.

Moving on to Page 13, adjusted non-GAAP earnings. And those of you who are with us on a quarter-to-quarter basis, certainly understand how this schedule works. But effectively, what we do is take the GAAP earnings from the end of the quarter, 2018 is in the far left margin and the GAAP from 3 months ended in [2013] and in 2017 on the far right margin, and we move towards the middle to get to the non-GAAP numbers for comparison purposes. We do exclude certain items on a going-forward basis. We do exclude weather. We did have unfavorable weather both in '17 and '18 in the third quarter. This particular quarter in 2018, we also excluded $17.5 million of the liability reduction for the QF liability and that's shown as well. We also have 2 other items that are just primarily there to, from a non-GAAP basis, properly display, what we believe, a better display of our OG&A expenses since both the pension items and the nonemployee deferred compensation, I talked about earlier, effectively offset in OG&A and other income. When you take all those items into consideration, as I mentioned earlier, our diluted earnings per share was $0.87 for the quarter, adding back $0.02 for unfavorable weather and taking out $0.26 for the gain on the QF liability, we had a non-GAAP diluted EPS of $0.63 for the quarter. That compared to $0.47 for the prior year quarter.

Also, looking at the variances throughout the P&L. When you make those adjustments, we still had strong improvement in gross margin of about 5.7%. Continue to stay on top of our operating expenses, and even though we had increases in property taxes and depreciation, we're able to actually manage, on a non-GAAP basis, our OG&A to a decline. That helped keep total operating expenses up only 2.3%, which certainly helped operating income at 17% and flow-through down to pretax income of 26% and net income of 38% improvement. So a good quarter from that perspective.

Moving on to Page 14. 2018 earnings guidance just at the -- the chart at the top of the page, the blue bars and the square boxes demonstrates over time, from 2012 to 2017, 6.8% non-GAAP adjusted EPS growth rate plus a history of meeting our guidance. To the far right of that chart shows our 2018 guidance of $3.35 to $3.50. We're reaffirming that guidance during this quarter. One thing I would like to remind folks in terms of what's in our guidance and what's not. Those assumptions there, I think, you are already aware, we always assume normal weather. We provide an income tax rate which is 0% to 5% of pretax income, and we provide a guidance in terms of our diluted average shares, 50.1 million. No change in that from prior quarters. So thus not planning any additional equity for the remainder of the year.

I do want to point out though, our guidance does not include any -- it does include, I should be clear, equitable regulatory treatment on our Tax Cuts and Job Act filing, in line with our filing, and then recovery of Montana energy supply costs as proposed in our pending PCCAM filing. Lastly, continued investment in our system to serve our customers and communities is expected to provide a targeted long-term growth of 6% to 9% total return to our investors through a combination of earnings growth and dividend yield.

Turning to Page 15 and talking more about our full year non-GAAP guidance. At the top left side of the page, you see our 6-month ended June 30, 2018 actual results, reported GAAP of $2 -- again, on a year-to-date basis, $2.05. Diluted EPS, when you remove on a year-to-date basis, favorable weather of $0.05 and remove the gain on the QF liability of $0.26, it brings us down to an adjusted non-GAAP year-to-date $1.74. In order to achieve our $3.35 to $3.50 for full year EPS to the far right in the top of the page, we'll have to achieve in quarters 3 and 4 a total of $1.61 to $1.76 of EPS. And looking at our actual that's down below for the 6-month ended June 30, 2017, you can see in Q3 and Q4, we achieved a non-GAAP number of $1.70, which is comfortably in between our -- what we need from the remainder of 2018, $1.61 to $1.76.

Moving forward, I guess, I pass it back to Bob, actually, looking forward.

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [5]

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Thank you, Brian. Great, segue, whether planned or not. Starting very high level on the regulatory front, obviously, we will continue to focus on historic fair treatment of implementation of federal tax reform. We do have our proceedings underway in multiple jurisdiction there. And the ultimate goal is simply to ensure that the benefit does flow through to customers in some way, while very importantly, keeping shareholders, keeping investors full, and we have proposed mechanisms to ensure that, that occurs. Secondly, continuing to move ahead on implementation in Montana of a new Power Cost and Credit Adjustment Mechanism. And the third, working on preparation of electric rate case to be filed by the end of 2018 based on our 2017 test year, and we have been consulting with a stakeholder group -- a related stakeholder in Montana, the Customer Vision Group, and they're -- we're engaging them to discuss really the future looking policies to allow us to be aligned as much as possible ultimately with our customers' interest. Our core investment, you'll see this in our capital plan, continues to have a very strong transmission and distribution infrastructure focus there. We have transitioned from successful implementation and conclusion of our distribution system infrastructure plan to really an end-to-end infrastructure investment plan. In Montana, that was with guidance from an infrastructure stakeholder group, and in South Dakota, guidance from a parallel group. An area of interest in South Dakota was what we call network South Dakota infrastructure group, really creative ways to build out our natural gas service to more communities and talk about that in more detail over coming quarters. Obviously, safety and compliance are important values, and we do have significant investments associated with integrity -- with the PHMSA Integrity Verification Process and requirements. Grid modernization, we've taken a conservative approach to grid mod focusing initially on the basic infrastructure, but now moving into both advanced metering infrastructure and advanced distribution management systems, and we're moving towards implementation first in Nebraska and South Dakota.

Our supply group is actively updating our 2 electric supply plans. In Montana, the focus is least cost, lowest risk approaches to address our core needs and that is for sustained intermittent capacity and reserve margins, and we've discussed those needs, that exposure in detail on previous calls, and you can look for a Montana plan towards the end of this year. A major activity in the Montana plan has been the release of a request for information and the sponsors to the RFI are due by the end of this month and then those will be an input into the Montana plan. In South Dakota, the focus has been at generation fleet assessment to evaluate economic retirement and replacement opportunities that potentially provide benefits not just on the supply side, but also on the kind of local distribution side. I think, you can look forward to us discussing the South Dakota plant and implementation in more detail in our October call. We are a low-cost operator, particularly marketing against our peers and we continue to monitor costs, including labor benefits and, of course, property taxes, and I think we've done a good job of mitigating those increases. So cost control is an important ongoing value.

Just a little bit more detail on implementation of the Tax Cuts and Jobs Act. As I mentioned, dockets have been initiated in each jurisdiction to ensure that customers do receive benefit in ways that are fair to investors as well. So we do have filings open. We don't expect material impacts from either FERC or Nebraska filings. As of June 30, we deferred approximately $13.5 million associated with Tax Act implementation, but the revenue deferral was offset by a corresponding reduction in income tax expense. So -- and as a result, no impact to net income. We calculated the customer benefits using 2 alternate methods: one based on current expenses; and one using an historic test method. Considering, of course, the historic method is -- it's not very difficult to go back and re-create all aspects of an historic test year and if you're not able to do that, essentially turn back the clock or reopen all of the books, there is a real concern, I think, about asymmetry and fairness to investors.

The expected full year 2018 revenue reduction for the current period method would be $18 million to $23 million, which again, would be offset by an equal reduction in income expense and therefore, we have no income to net -- no impact to net income. On the other hand, application of the historic method could result in customer refunds that do exceed the 2018 tax benefits and therefore, would result in $5 million to $10 million of additional pretax earnings and cash flow determent for the year.

Use of the deferred revenue for the regulatory liability will be determined in the pending dockets. In Montana, an August 30 hearing has been scheduled. South Dakota and Nebraska schedules are pending. So as a result of tax reform, we've updated our 2018 ETR assumption to between 0% and 5% and previously that was 8% to 12%. We've also reduced our deferred tax liability by about $320 million as of December 31 of last year, and this reduction was offset in regulatory assets and liabilities.

NOLs are now anticipated to be fully used in 2020. Previously, we had projected 2021. We currently -- and this is important of course, we currently believe our debt coverage ratios will be adequate to maintain existing credit ratings. However, further negative regulatory actions could lead to credit downgrades and could necessitate additional equity issuances, both emphasis are important.

Turning to the capital forecast for 2018. We've discussed this before. We see really a level of capital projection based on current plans out over the next 5 years and also a good balance between jurisdictions and between electric and gas, and the cumulative current 5-year estimate is $1.596 billion. We anticipate funding these investments with a combination of cash flows, again, aided by NOLs through 2020, as well as the equity distribution. You should note that the equity distribution is now complete and had a gross average share price just below $58, so we consider that to have been a successful program. Significant capital investments that are not in the above projections or further negative regulatory actions could necessitate additional equity issuances. But based on the plans as reflected in this capital forecast and assuming no negative regulatory actions, we don't anticipate further equity issuances at this time.

As we discussed previously, the changes in the 2018 forecast involve, first that $123 million of previously included capacity generation has been removed pending the issuance of the jurisdictional supply plans and included, there's been about $126 million of incremental investment related to grid modernization and AMI infrastructures starting first in South Dakota and Nebraska. And should note, again, that for those 2 jurisdictions, we did previously include about $28 million in adjustments.

So with that, we'll open up the bridge for questions. And I did ask our operator to queue up the easy questions first.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go to Michael Weinstein with Crédit Suisse.

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Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [2]

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Just -- it looks like on Slide 15, you are excluding the QF gain right from guidance as well, right? It's not part of your -- not going to be part of your means to reach guidance for this year, right?

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Brian B. Bird, NorthWestern Corporation - VP & CFO [3]

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That's correct. The 17.5% we excluded. It's not included in our guidance, correct.

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Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [4]

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Okay. Just wanted to confirm that. And could you talk a little bit about -- can you just confirm that you'll be filing the rate case no later than September 30, even if the PCCAM case is not resolved by that time?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [5]

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All systems go, yes.

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Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [6]

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So -- I mean, how do you do that? How do you file a rate case without knowing how that -- how the generation starts to turning out?

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Brian B. Bird, NorthWestern Corporation - VP & CFO [7]

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We will have to work through that. There, certainly, will be noise, but we will see we'll get it done.

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Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [8]

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Okay. And could you just give a little bit more color on bifurcation, the ruling on that and why you think Commissioner Kavulla might choose to recuse himself from the case?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [9]

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We can't speak for Commissioner Kavulla but he would serve through the end of the year and that would be the early stages of the case. But that really is a question for Commissioner Kavulla In terms of bifurcation, our experience has been -- the commissions' experience has been that bifurcation has really allowed the clear and more orderly conduct of cases. So we think that's a positive in that scenario than revenue requirement is an input into cost allocation and developing a pricing structure and that's worked well. We have concern about the commissions' approach to our bifurcation request, effectively leading the revenue requirement open. I think that creates an extended period of uncertainty and certainly is troublesome from an industrial perspective as well.

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Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [10]

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All right. And I think is it true that Commissioner Kavulla recused himself from the bifurcation decision?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [11]

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I should point out that in terms of the -- if you're referring specifically to the work session earlier this week, we don’t have a written order on our motion for reconsideration yet.

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Operator [12]

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Our next question comes from Julien Dumoulin-Smith.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [13]

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Few different questions here. Maybe to pick up on where Mike left off on the QF stuff. Can you comment a little bit more specifically on the $7.6 million benefit to the annual adjustment? First, is that in your guidance? Just to be very clear when you contemplate it, I imagine not. But then can you give a little more thought process around how the outages relate -- or if at all, related to these price escalations or why does it impact now maybe?

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Brian B. Bird, NorthWestern Corporation - VP & CFO [14]

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Now the outages have an impact because we actually are able to procure power at a lower cost than the QF cost that are in the particular liability itself. So the outages certainly helped. And to your first question in terms of any amount in guides, we did have a small amount in guidance at the start of the year because one of the QFs actually was out of service for a period of time in the fourth quarter, and we knew that going into the period of time. But it certainly wasn't the level of the $7.6 million benefit that we had this year and should also point out, this is -- we did have a $2.1 million benefit last year as well. So the $7.6 million was the increase, if you will, on a year-over-year basis.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [15]

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Right. But more importantly, the outage element here doesn't necessarily -- doesn't necessarily impact this on an ongoing basis. This, as you say, the year-over-year impact based on a specific outage?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [16]

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That's right. That's year-over-year doesn't impact things on a going-forward basis and unless these QFs were out of service for a long period of time.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [17]

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Right. And to be clear, you had some amount of this not necessarily defined in your guidance based on what was already looking like a set up into 2018 with some degree of outage on this asset?

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Brian B. Bird, NorthWestern Corporation - VP & CFO [18]

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Correct.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [19]

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All righty. Excellent. I'm going to just keep going here on, can you give us a little bit more of a sense to the earnings impact if you use an asymmetric sharing band in PCCAM? Just can you give us a little bit of a sense of maybe even the sensitivities to think about that real quickly? And then maybe in tandem with that, obviously, the process is ongoing here. Is there any chance to settle here just to kind of hit that?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [20]

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I'll speak to the second question. We are always open to constructive discussions with parties. On the other hand, we can't discuss settlement discussions, specifically, but we're always open to talking to parties.

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Brian B. Bird, NorthWestern Corporation - VP & CFO [21]

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And on the first question, Julien, it's very difficult for us to ascertain the impact of asymmetrical sharing of debt bands and the like and certainly not comfortable talking about this on this call.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [22]

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Fair enough. I know it's a little tricky. Now, just the last -- oh, sorry.

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [23]

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I'm going to add one thing. I know that for some parties, including us, the ability to -- this is a generic comment, but the ability to settle a case depends on some comfort with how the regulator in that particular case will view a settlement and how much confidence you might have that a settlement will ultimately be approved as agreed to.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [24]

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That's a fair comment. Perhaps just a last quick question. Can you confirm the $5 million to $10 million of pretax earnings impact from applying the historic method with regards to tax reform is a onetime element? Or is that an ongoing element into '19 and onwards if indeed adopted?

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Brian B. Bird, NorthWestern Corporation - VP & CFO [25]

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I would argue, it's a -- it's an annual impact until you get a rate case resolved, right? So you could argue an annual impact for '18 and a portion of '19 could be an impact as well. Now again, if the historic method, of course, on a going-forward basis, they will capture our new tax structure, but will also capture all the increases in cost elsewhere, which would have been a appropriate way to handle this issue to begin with.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [26]

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So your expectation is basically by the time you get new rates and start whatever date that may be, this should effectively rollout?

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Brian B. Bird, NorthWestern Corporation - VP & CFO [27]

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Correct.

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Operator [28]

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Our next question comes from Paul Ridzon with KeyBanc.

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [29]

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Can you just quickly review the calendar on the PCCAM and tax dockets?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [30]

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Sure. Let's -- let us pull that up quickly. On PCCAM, briefing is ongoing. Reply briefs are due on August 31. So we don't expect a decision until September at the earliest, and obviously, the commission needs time for you to agree to schedule work sessions and then ultimately, decide. But the window will open essentially in September. And concerning the Tax Cut and Jobs Act implementation in Montana, opening and intervenor testimony has been filed for rebuttal and cross-intervenor testimony has been filed, rebuttal testimony is due August 2, and the hearing will be held on August 31 with deliberations -- briefs and deliberations sometime after that. In Nebraska, there's been a tentative settlement reached. Nebraska is a little bit of a different approach, where we typically negotiate regulatory decisions with the municipal jurisdictions and then those are submitted to the Nebraska Public Service Commission for review. So at this point, we're waiting for an order from the Nebraska Commission. In South Dakota, the active settlement discussions with the commission staff, and those are positive to date at the FERC. There's no real deadline by which the FERC needs to make a decision. However, earlier this spring, the FERC did indicate that it intended to act on all of these filings, and they, of course, have many, within 180 days, which would move you into September or November.

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [31]

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Any commentary on any legislative intervention on the PCCAM issue? And has legislators become involving in this with the commission?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [32]

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The interim legislative committee certainly has an oversight function and is aware of the docket and developments in the docket. But I have no comments beyond that.

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Operator [33]

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We'll now hear from Jonathan Reeder with Wells Fargo.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [34]

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Bob, did I miss you give a more specific time frame as when you think the tax reform treatment in Montana would be decided?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [35]

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Yes. In Montana, specifically, there will be a hearing starting on August 30. And subsequent to the hearing, there will be presumably some kind of a briefing schedule and then that would push the decision off potentially to later in the year.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [36]

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Okay. But -- so other than before year-end, no real specifics at this juncture?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [37]

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I don't -- I would be hard-pressed to say anything beyond that.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [38]

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Okay. Did the parameters of the potential kind of historic test period method kind of get tweaked? I thought on the Q1 call, you gave some bit higher numbers like an $8 million to $12 million range as opposed to the $5 million to $10 million cited today.

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [39]

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Yes. Brian, go ahead.

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Brian B. Bird, NorthWestern Corporation - VP & CFO [40]

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They did change slightly. I mean, obviously, we're through the midpoint of the year, and we looked at adjusted numbers a bit and expectation that, that could change, but also take in consideration the total, you'll notice that we increased the range for the current year method, but also decreased the range from the historical methods, and one would argue there is differentials decreased a bit.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [41]

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Okay. I got you. And then finally, can you give a little more color on the Customer Vision stakeholder process in Montana? And how, if at all, it's shaping the way you're approaching the rate filing and what you plan to request?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [42]

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Yes. The -- well, the original notion was to work with this proof to at least narrow differences, identify areas of key interest and then use those to inform the rate design filing in a second part of the case. Given where we understand the commission is at this point, we intend to file a complete soup-to-nuts case at the end of September. We've had tremendous success with stakeholder groups certainly over the last 10 years that I've been with Northwestern. We take them seriously. We find the input valuable. In this case, we got a very diverse group, an expert external facilitator. The rate filing will be a backdrop to discussions in the Customer Vision Group. But really, what we're trying to do is identify the set of policies that are appropriate, at least for this company in Montana going forward to help address some of the disconnects we think between the current regulatory structure, customer expectations and public policy. What we're doing in that process right now is trying to gather information from outside of Montana, stick our heads up and look around a little bit, but look at situations that might be of interest and relatively more relevant to Montana. So actually on Monday, Ann McCabe, the former Illinois Commissioner, who was in the middle of the regulatory reform in the early stages of grid modernization in Illinois is going to be speaking to the group. Last month, we heard about a very broad sustained effort in Minnesota. We're also going to be looking this fall at some interesting things that Green Mountain has been doing when the -- whenever Paul, the CEO, from Green Mountain comes out. So we're putting a pretty diverse set of perspectives in front of us through trying to look at some examples that might be a little bit more relevant to Montana than look, for example, the New York REV or whatever is happening in California would be.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [43]

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Okay. So it's a very -- a kind of broad big picture kind of focus stakeholder throughput. Near term, I guess, it would influence your rate design aspects of the case?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [44]

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As originally conceived, it was going to be an input, but again, now we will be filing a complete rate case at the end of September. So that will -- that filing will be based on our views, not on -- not really on input from the group because that discussion really is still in the -- not entirely, but primarily in the information sharing stage. Okay.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [45]

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All right. Well, I appreciate you taking the time to answer my questions and good luck as you press into the important stuff with the commission coming up.

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [46]

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Thanks, Jonathan.

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Brian B. Bird, NorthWestern Corporation - VP & CFO [47]

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Thanks, Jonathan.

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Operator [48]

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Our next question comes from Andrew Levi with ExodusPoint.

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Andrew Levi, [49]

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Can you hear me?

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Brian B. Bird, NorthWestern Corporation - VP & CFO [50]

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We can hear you, Andy.

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Andrew Levi, [51]

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Actually, most of my questions were asked already. Just two simple ones. So just -- where do we fall as far as your guidance range right now? Do you guys think are you really in the middle, the low end, high end based on what you've seen thus far...

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [52]

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Brian, is taking some...

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Andrew Levi, [53]

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Again, excluding any regularly changes?

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Brian B. Bird, NorthWestern Corporation - VP & CFO [54]

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Yes. Andy, we have reaffirmed our $3.35 to $3.50.

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Andrew Levi, [55]

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Okay. So you're kind of trending towards the middle, is that what you're saying?

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Brian B. Bird, NorthWestern Corporation - VP & CFO [56]

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No. And it wasn't a simple question, was it? We're reaffirming our $3.35 to $3.50

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Andrew Levi, [57]

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Okay. That's fair. And then the second one, I guess, is more for Bob. But where do you guys fall as far as your view on M&A? And I know, we've discussed this before, Bob. But in the context of NWE, whatever you'd like to say in, obviously, a context of continuing consolidation within the industry?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [58]

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Really, at this point, no comment. We've offered our philosophical views previously, and I really don't have anything to add to that.

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Andrew Levi, [59]

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You guys don't have much to say?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [60]

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We have a quiet bunch here in Aberdeen.

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Operator [61]

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(Operator Instructions) We'll go to Paul Patterson with Glenrock Associates.

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Paul Patterson, Glenrock Associates LLC - Analyst [62]

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Lot of my questions been answered, but just a few quick ones. Just on -- on the $17.5 million that benefit does not included in your ongoing earnings. But how does that work over time as the contracts work their way through if you follow me? Is there any earnings impact that we should think about that going forward?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [63]

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Yes, we have noncash interest associated with that liability that as a result of the reduction in liability, we'll see an improvement in noncash interest of about $1.3 million each year. But we -- that's a periodic liability adjustment and so you can have adjustments as I mentioned. The last time we made an adjustment was in 2015 for that. So there's exposure -- but probably way back in '15 that was a loss that we recorded that year. So there's going to be potential impacts on earnings. But that contract that provides that particular exposure goes through 2024. So that's the period of time that we could have exposure to that contract in terms of some volatility to earnings. And in addition to that contract, as we talked about the other component, the QF liabilities, each and every year, there's a issue in terms of what's the actual production from these units and what's actual price. So those impacts come into play as well.

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Paul Patterson, Glenrock Associates LLC - Analyst [64]

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Okay. So there might be a -- if I understand you correctly, there might be a benefit going forward, but the fact that this thing is always being adjusted, et cetera, means that there's not a lot of predictability to it? Does that makes sense?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [65]

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That's a great summation.

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Paul Patterson, Glenrock Associates LLC - Analyst [66]

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Okay. And then the comments that you made with respect to equity issuance not needed in the absence of a negative regulatory outcome, is that just a generic statement? Or I mean, is there -- I mean, just to sort of put a finer point on it, should we think about this in relation to the PCCAM or with respect to the upcoming rate filing? Or could you just elaborate a little bit more on that? I mean -- or is it just sort of the -- you're just sort of highlighting that because of the regulatory environment that you're in? Do you follow what I'm saying?

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Brian B. Bird, NorthWestern Corporation - VP & CFO [67]

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Yes, I'm comfortable in your question. First of all, let me speak about the rate case. It has nothing to do with the rate case whatsoever. Matter of fact, we're looking forward to the rate case. there's been a tremendous amount of investment we've made in this company, and we think we've done customers the right thing to try to stay out of rate cases for years, but it's time to get recovery on that investment, so we look forward to the rate case. We just see a tremendous amount of exposure on tax reform and PCCAM and don't know what those outcomes, and as my earlier question, it's difficult to gauge what those outcomes would be. We're not sure where PCCAM ultimately will end up. It's easier to kind of understand the differential on tax reform. We just want to be clear that there's a potential that we could have to do something from an active perspective, but I also am going to tell you there's a -- certainly, it's our intent to try to manage any outcome without having to raise equity, try to manage our business accordingly.

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Operator [68]

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And we have a follow-up from Michael.

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Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [69]

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One quick follow-up on the guidance. So the $17.5 million benefit from the QFs, that's excluded and not include -- not benefiting guidance, but the $7.6 million benefit from the outages -- related to the outages, that's the ongoing adjustment. That is actually in the guidance, and I believe about a $5 million improvement over the last year? Is that a fair read of it?

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Brian B. Bird, NorthWestern Corporation - VP & CFO [70]

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Yes. Mike, let me just straighten it out a little bit, though you're directionally correct. Since the -- the $7.6 million that was the increase on a year-over-year basis. There was a $2.1 million gain last year, $7.6 million increase this year, and so we had a small amount, and I'm not going to give you the actual amount, of an impact built into our margin guidance associated with the fact that we're aware of outages at the end of the year. It wasn't certainly the near -- anything near the $7.6 million number...

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Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [71]

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Yes. That's right. So I mean -- if it was -- if you were assuming the same thing as last year, you're about a little over $5 million more. This year, it looks like almost $0.07 a share. Is there any reason why we didn't move up the guidance range at all if at that, or is it being conservative? What's your thinking on that?

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Brian B. Bird, NorthWestern Corporation - VP & CFO [72]

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My thinking is we reaffirmed our guidance at $3.35, Michael. There's quite bit of the year left too from our perspective and kind of....

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Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [73]

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Yes. It's only second quarter.

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Operator [74]

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It looks like we have a follow-up from Andrew Levi as well.

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Andrew Levi, [75]

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Okay. Let's try this one more time. So if we have normal weather, normal conditions between now and the end of the year and you booked that extra $7.4 million, so everything kind of comes in as expected. And as the year had been guided to, would that amount lead to earnings above the midpoint?

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Brian B. Bird, NorthWestern Corporation - VP & CFO [76]

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I appreciate you trying again, Andy. My answer is the same. We're reaffirming our $3.35 to $3.50.

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [77]

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What I'm going to tell you is, thank you for the follow-up question. This is great practice for when Brian is on the stand in a month or so in the tax docket.

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Andrew Levi, [78]

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Okay. Well, if you needed someone else to testify for you, I'll help too, so...

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [79]

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Come on out.

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Operator [80]

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Gentlemen, no additional questions.

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [81]

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Just to wrap it up. We, obviously, appreciate the good discussion and interest over the quarter. At Page 20, we summarize some, we think, key characteristics of the company. We talked about these best corporate governance practices. I spent a minute at the top of the call talking about corrections of our board. In fact, we're a pure electric and gas utility freight foundations. We paid attention to those basics. We do have strong earnings and cash flow, and we talked about attractive, I would say, maybe more actionable future growth prospects. So those are things to keep in mind. I did my pitch for the Aberdeen Chamber of Commerce at the top of the call and the photo here on Page 20 is Mystic Dam, right on the edge of the Beartooth wilderness. It is one of the most amazing places, and I think, since you've covered the company, you owe it to yourselves to come out, and we'll take you on a hike up there, and if it's in June, our Supply Vice President, John Hines, will put you in a kayak. And this is a test on this. The hydro system, obviously, has been such a great asset for us, and we've realized so many values out of the hydro system beyond the energy that was really priced into the transaction, and this is very much a part of that. So again, thanks for joining us on the call. Look forward to seeing you over the coming months and visiting next quarter.

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Operator [82]

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Thank you. Ladies and gentlemen, again, that does conclude today's conference. Thank you, all, again, for your participation. You may now disconnect.