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Edited Transcript of NWE earnings conference call or presentation 13-Feb-20 8:00pm GMT

Q4 2019 NorthWestern Corp Earnings Call

Sioux Falls Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of NorthWestern Corp earnings conference call or presentation Thursday, February 13, 2020 at 8:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian B. Bird

NorthWestern Corporation - 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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* Brian J. Russo

Sidoti & Company, LLC - Research Analyst

* 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

* Shahriar Pourreza

Guggenheim Securities, LLC, Research Division - MD and Head of North American Power

* Vedula Murti

Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager

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Presentation

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Operator [1]

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Good day, and welcome to the NorthWestern Corporation's Year-End 2019 Financial Results Conference Call and Webcast.

At this time, I would like to turn the conference over to Northwestern's Investor Relations Officer, 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, Shelby. Good afternoon, and thank you for joining NorthWestern Corporation's financial results conference call and webcast for the year ending December 31, 2019. NorthWestern's results have been released and the release is available on our website at northwesternenergy.com. We have also released our 10-K premarket this morning.

Joining us on the call today are Bob Rowe, President and Chief Executive Officer; Brian Bird, Chief Financial Officer; and additionally, we have other members of the management team in the room with us to address your questions.

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

Today's presentation also contains non-GAAP financial measures. Please refer to the definitions and reconciliations of these measures that are included in our webcast materials.

Following our presentation, we'll open the phone lines to allow those dialed into the teleconference to ask questions. The archived replay of today's webcast will be available for one year beginning at 6:00 p.m. Eastern Time today and can be found on our website under Our Company, Investor Relations, Presentations and Webcasts link.

With that, I'll hand it over to President and CEO, Bob Rowe.

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

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Good afternoon. Thank you for joining us, and we're calling in from our Sioux Falls office where the temperatures have rocketed up over the last couple of hours, and it's now a positive 2 degrees Fahrenheit.

I'll start, as always, with some recent highlights. Net income for 2019 was $202.1 million. That's a $5.1 million or 2.6% increase compared to last year. Diluted EPS was $3.98, a $0.06 or 1.5% increase compared to last year. Non-GAAP adjusted EPS was $3.42, and that's a $0.03 or a 9% increase compared to 2018. The Board declared a quarterly dividend of $0.60 per share. That's a 4.3% increase, and that's payable March 31 to shareholders of record as of March 13.

Late last year, we issued a carbon reduction vision for our electric portfolio in Montana. We're targeting a 90% reduction in carbon intensity by 2045, starting from a 2010 baseline. In December, we also announced our transaction to acquire an incremental 25% or 185 megawatts of Colstrip Unit 4 from Puget Sound Energy for $1. In February, just this month, we filed a request for approval of the Colstrip acquisition with the Montana Commission. In December that commission -- the Montana Commission issued a final order approving our electric rate case settlement. And this month, we've also issued an all-source competitive solicitation or request for proposals for up to 220 megawatts of peaking and flexible capacity to be available for commercial operation early in 2023.

And with that, I'll turn it over to our CFO, Brian Bird, to walk through our financial results.

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

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Thanks, Bob. Slide 4 shows our summary of financial results. The takeaway there, as Bob talked about, net income $202.1 million, a $5.1 million or 2.6% improvement on a year-over-year basis. I'll get into details. But generally, the 2.3% improvement in gross margin that increase is a higher increase than our operating expenses of about 1.5%, resulting in operating income improvement about 4%. That ultimately drove our good results for the year on a year-over-year basis.

Turning to Slide 5. In terms of gross margin, gross margin of $939.9 million, a $20.8 million improvement or 2.3%. If you look into the major drivers there, I would talk about, 2 things are really from 2018, the Tax Cuts and Jobs Act impact benefit this year $22.1 million versus the '18 amount. That's offset also with a better electric qualified facilities liability adjustment in 2018. So kind of taking those 2 offsetting one another, what really drove the results to a great extent. We had good retail volumes on the gas side and electric retail volumes. We also saw some benefit from our rate increase, $4.4 million this year for a 9-month period, an improvement in our electric supply cost recovery. Offsetting that to a degree, we did see some reduction in our electric transmission revenues during the year and also stepped down our natural gas production rates. That total change in gross margin on those items that impact. Net income was $20.2 million. In addition, things that flow through trackers like property tax and production tax credits netted to $0.6 million increase in gross margin, again, netting to a total of $20.8 million increase in gross margin.

Moving forward to weather on Page 6. Upper right, just to summarize, we did estimate overall favorable weather in '19 resulted in a $7.3 million pretax benefit as compared to normal and a $6 million benefit compared to 2018. The calendar months and the weather maps reach month were very, very telling. All of the favorable weather benefit for the year really came in the first quarter. Really cold February and March helped drive the favorable results that really impacted the gas side of our business. When you look at the second and third quarter, we didn't have much cooling load at all. A matter of fact, it's net unfavorable weather, if you will, during that time period. And then in the fourth quarter, though October was cold, it certainly didn't do enough to offset a pretty mild December. And so again, net-net, the first quarter drove our favorable weather results for the year.

Moving on to Page 7, in terms of operating expenses. Operating expenses as a total $663 million, up $10.1 million or 1.5%. So keeping operating expenses low. The 2 primary benefits there is property taxes. Appeared to level off, certainly level off in '19. We hope to see that as a trend going forward, certainly no certainty of that, but certainly a good step in the right direction to see those leveling off, up $0.6 million or 0.4%. Also, the depreciation and depletion, actually down $1.6 million or down approximately 1%. The reason there being, obviously, we've had increased depreciation as we continue to invest in our assets, but the $9 million improvement in depreciation rates is a result of the rate case settlement is the primary driver for the reduction on a net basis.

In terms of operating, general and administrative expenses, we've shared in the past that we did and opened the first strings a bit, if you will, from -- on our expenses. We did note throughout the year, we're going to be spending more on hazard trees and made really good progress on that during the year. We did, through both our generation and our T&D business, increased maintenance expenses across the board. Labor was up a bit during the year. And then additional legal, technology and benefits are other primary increases in OG&A. You may note that last quarter on a year-to-date basis, we did have quite a big large other. There were questions associated with that. We did in the fourth quarter break that out a bit more, so people could see that. That change there in those items impacting net income from an OG&A perspective, $17.3 million. When you take a look at items that certainly are in the OG&A category, but are offset elsewhere in the P&L, $7.8 million pension, some operating expenses recovered in trackers and then $2.3 million nonemployee directors deferred comp. Both the pension and deferred comp item you'll see in a moment, offset in other income. Those changes were a decreased OG&A of $6.2 million for a net increase in OG&A of $11.1 million.

On the next Page 8, operating income of $276.9 million, up $10.6 million or 4%. Below that interest expense, up primarily due to higher borrowings $3.1 million. Other income, as I just spoke, the main decrease is really netting the pension item and the deferred comp item, I just spoke to, in OG&A. But also -- that was also partly offset by $1.6 million, a higher capitalization of AFUDC. The net there that from an income before tax, $182.2 million, $3.9 million increase or 2.2%. And then following that, we did have a slightly higher income tax benefit on a year-over-year basis. I'll speak to that in a moment to explain that difference given to net income, I spoke earlier of a $5.1 million improvement.

On Page 9, income tax itself. The 2 biggest drivers, we had a release of an unrecognized tax benefit in 2019 of $22.8 million that was offset by the impact of the Tax Cuts and Jobs Act, excess deferred taxes in 2018 of $19.8 million. That $3 million difference is the primary difference. Other things like the slight improvement in pretax income also drove the net result of an income tax benefit -- incremental benefit of $1.2 million for the year.

Moving on to the balance sheet. Not much to really say here on Page 10. Obviously, continue to see improvement in shareholders' equity. But ratio of debt to total capitalization and continue to see a downward trend as we continue to shore up our credit metrics and always keyed in on our FFO to debt, try and make sure we maintain our BBB flat unsecured credit ratings.

Moving on to the cash flow statement on Page 11. We did see a falloff in cash provided by operating activities of approximately $85 million. On a year-over-year basis in the red box to the right, we really identify 5 things that drove that. We did have an underselection -- undercollection of supply costs during the year, not only do we have higher supply cost, but our method now collecting those are on an annual basis versus a monthly basis. And as a result of the PCAM settlement that had some aspects to do with it as well. But that undersupply, we are now collecting in 2020. So we do expect to see a bit better cash flow, certainly on a year-over-year basis.

The Tax Cuts and Jobs Act. We had that settlement that we had in '18. Actual refunds to customers didn't start occurring into '19. There's the $20.5 million there. And then the change year-over-year in terms of people providing deposits for generation, interconnections was actually a net refund, $22.1 million for the year. Those are the 3 biggest drivers of the $85.3 million.

Moving forward on to Page 12, from an adjusted non-GAAP earnings perspective. I think people who follow the company come to understand this page to the far left of the far right really is the GAAP numbers for '19 and far right GAAP for '18. And then we work towards a non-GAAP numbers for both '19 and '18 in the middle and the best you can compare those.

Starting from the far left, included EPS of $3.98 on a GAAP basis. We had 2 adjustments this year. We took out $0.11 of favorable weather, and we backed out $0.45 associated with the unrecognized tax benefit, getting us to $3.42. On a relative -- on a comparison basis, last year's GAAP number in '18, $3.92. We had 3 items that we've backed out of that number, $0.02 of favorable weather, $0.26 associated with QF liability adjustment, $0.25 associated with TCJA, netting to a $3.39 non-GAAP EPS in 2018, a $0.03 improvement or just under 1%. In -- comparing the middle columns through the P&L, gross margin up about 3%. Also, operating expenses, up about 3%. Even though property taxes and depreciation -- actually depreciate slightly down, we did have a higher amount of OG&A, and we plan to spend more. We talked about hazard trees. We talked about some other categories of incremental spend we wanted to have in '19. That -- considering that improvement in gross margin, increase in operating expenses at 2.8% improvement in operating income and net ultimately in a 2.2% increase in net income on a non-GAAP basis.

Moving forward to Page 13. Diluting earnings per share over this time period, you see it from both a GAAP perspective and a non-GAAP perspective. On a non-GAAP basis, our EPS has grown on an average over 5% from 2013 to 2019. We'll tell you that we do also show on 2020 column, our guidance range of $3.45, $3.60 per diluted share. We do note here really the 3 assumptions, normal weather. We give you a consolidated income tax rate of 2% benefit to 3% tax increase based upon pretax income and then diluted shares outstanding of $50.9 million.

Lastly, regarding our 6% to 9% total return, long-term look one thing I would mention here is we do see our capital spend now getting up in 2020, in 2021 to $400 million. Should we be able to sustain that level on a going-forward basis? I expect us to move towards the middle of that 6% to 9% total return -- total shareholder return range, again, assuming reasonable recovery.

Now moving forward. 2019 non-GAAP to 2020 EPS bridge to the right, I mentioned the $3.45 to $3.60 million range. How do we get there? Starting at $3.42 a share, we show kind of some low and high points to get to that range. What are some of the drivers on gross margin? Certainly, we expect the 1% plus of organic growth. We expect higher industrial and commercial loads. We expect some improvement in transmission revenues, and we expect to get a full year benefit from the rate case. And then lastly, we had a wet year from an irrigation perspective in '19. We expect to see some improvement in irrigation revenues in 2020. That should help on the gross margin side. And OG&A expense decreases really across the board. We're looking at the business, trying to maintain cost control in 2020 after, kind of, as I said, releasing some of the first strings in '19, certainly tightening up here again in '20. We've made great progress on hazard trees in '19, expect to spend a little less in that category in 2020 and that range of $0.11 to $0.14. Those are the 2 big drivers for improvement between gross margin increase and OG&A decreased thinking property tax, depreciation and interest expense for a growing company, expect to see those each increasing year-over-year. Other income with the South Dakota generation and increased capital spend, we'll speak to in a moment. We're expecting a bit more AFUDC on a year-over-year basis. And lastly, we continued to focus on repairs tax deductions and expected incremental tax benefit associated with that. That nets us to $3.45 to $3.63 with up to a range from $0 to $0.03 of potential dilution from equity needs likely late 2020 to possibly early 2021. We see a net range of $3.45 to $3.60. When you take into consideration -- we're at midpoint of that at $3.53. When you look at the dividend, we announced today, and annualize that, that's $2.40. You compare that $2.40 to the midpoint of the range we just provided a $3.53. That's about a 68% dividend payout.

Lastly, on this page, I'd speak to taxes. Some good news regarding that. We did expect to be going through our NOLs in 2020. Now that's 2021. And as a result of pushing that back a year with (inaudible) credits and PTC credits being available now into 2023, that used to be 2022 to reduce cash taxes. And lastly, we anticipate our effective tax rate to reach approximately 10% by 2023. And with that, I'll pass back to Bob.

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

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Thank you, Brian. I'll start with a couple of words about our carbon statement in Montana. And as you know, that's targeted 90% reduction in carbon intensity by 2045 as compared to a 2010 baseline in the baseline is the result of effectively that's in Colstrip unit 4 was able to be fully dedicated to serve our customers, the first resource that we had in Montana after going through deregulation and divestiture of the Montana power days. As you know, we are already over 60% carbon-free on a delivered basis in Montana that compares to 28% average nationwide.

This is a Montana-specific statement. Although it's notable in South Dakota, we are, I think, about 32% carbon-free right now. We've referred to this as really a no [BS], kind of a carbon statement or not a lot of qualifications to it. It's driven by continued renewables coming on, actually very soon, we will have more wind on our Montana system than we have hydro, and we'll have more wind or hydro, and we have coal from Colstrip, even after we closed the additional acquisition at Colstrip. Energy efficiency continues to be important. Thermal resources will be very important in meeting our customers' demands in Montana, dispatchable resources. But the frequency, the range of dispatch is going to diminish as other resources come online towards the end of the decade. If we expect the thermal resources that will be retired. So this is a glide path. It's also worth noting that this really is linked to the same modeling assumptions as in our resource plan and just like the resource plan. This will be updated on a regular basis, and that will allow us to capture changes in economics, changes in technology, changes in public policy. One of the things I'm particularly excited about that will help us achieve this vision is working with a group of communities that have their own sustainability goals, sustainability programs in Montana to help them craft and implement solutions that make sense for them, while also recognizing our legal obligations to all of our customers. That will be just a great opportunity to work directly with our customers.

Turning then to the announced acquisition of 25% of Colstrip Unit 4 on December 9. We executed a purchase and sale agreement to acquire Puget Sound Energy's 25% ownership in Unit 4. It's 185 megawatts. That would bring our total ownership at Colstrip to 407 megawatts or 55% of Unit 4. And as I mentioned, even with that additional acquisition, we will have both more hydro and/or win our system. A brand that deep into his pockets and find $1 to pay for the resource very importantly, Puget Sound will retain responsibility for its current pro rata ownership share for environmental attention liabilities as well as for ultimate closing comps.

In tandem, we will enter into a purchase power agreement, under which we will sell 90 megawatts back to Puget, 4 or 5 years, indexed to the Mid-C index, but with a floor of costs. And our proposal is to essentially put the profits from that PPA into a trust to prefund pretty meaningful down payment on an eventual closing costs for Unit 4. We think that's first sited and responsible, recognizing that all assets do have useful lives. We filed for approval of the transaction in its various parts with the Montana Commission. They are responsible in setting a schedule interventions are due in the first few days of March and we certainly don't see any reason why the transaction couldn't be reviewed and approved by the end of the year, which we think is important in being able to implement the elements of the proposal and start achieving those benefits for our customers. And as you know, we are uniquely exposed to prices in the western power market, 46% reserve margin deficit at peak concerns about that, meaning peak requirements are now a primary focus in the Western United States and even sharper focus in the Pacific Northwest and acute focus in our Montana operation. Again, because in part of the legacy of supply deregulation.

So we think this is very important in addressing about 1/4 of our customers' exposure to peak.

Turning on to the South Dakota and then the Montana electric plan. First, South Dakota, it's been a straightforward in an efficient process. We've published our plan in the fall of 2018, really focused on modernizing our fleet to address reliability, flexibility and particularly to maintain our compliance with Southwest power pool requirements to be able to participate on behalf of our customers as effectively as possible in SPP. So we identified at 90 megawatts of existing generation that should be retired and replaced over the next 10 years. I think we're running over a decade. Then on April 15, 2019, we issued a request for proposals for 60 megawatts of flexible capacity resources to begin serving our South Dakota customers by the end of 2021. It's a very robust process, again, administered by a third party, lots of interest in the process, a good variety of submissions. As a result of the competitive process, we do expect to construct and own a natural gas-fired reciprocal -- reciprocating internal combustion engines or RICE units at a brownfield site here in Huron, and then depending on manufacturer selection, we anticipate between 55 and 60 megawatts of new capacity, should be online by late 2021 at a total investment of about $80 million. And the selection proposal is subject to execution of construction contracts and then obtaining the applicable environmental and construction permits. So that's South Dakota. We're very excited to see that move forward.

Turning to the Montana plan. There, the focus was on developing resources that will address the really dramatically changing energy landscape in Montana and in the west to meet our customers' needs in a reliable and an affordable fashion. As I referenced just a moment ago, we are severely exposed at peak. Right now, we're about 630 megawatts short of our peak needs, and that's in a market in which traditional resources are shuttering and a regional market that isn't where providers and planners are increasingly concerned about loss of loan probability in the not terribly distant future.

Right now, we are at market on behalf of our customers and being at market at peak with a skinny set of resources is not a very good place to be for our customers. We forecast that our portfolio will be about 725 megawatts short in just 5 years, considering expiring contracts and then just a very modest increase in customer demand.

So this month, we've issued a competitive all-source RFP for up to 280 megawatts of flexible peaking capacity to be available for commercial operation in early 2023. As the note indicates, the RFP is open to all types of resources provided that they can meet our needs for peak and flexible capacity. There will be an independent evaluator to administer and then to evaluate proposals and the successful project or projects should be selected by the first quarter of next year. Then we expect to kind of wash, rinse and repeat and run a subsequent process in a future year.

Turning to some other matters on the regulatory front. As you know, in December, the commission issued a final order, most importantly, approving the electric rate case settlement in our Montana case, effective April 1, 2019, and that would result in an annual increase to electric revenue of about $6.5 million based on a 9.65% ROE and the capital structure as we have proposed and then a $9.3 million decrease in depreciation expenses. Several parties have filed petitions for reconsideration of various parts of the order, particularly a request for reconsideration by the Montana Consumer Council concerning the decoupling or infrastructure funding mechanism that had been proposed by Natural Resource Defense Council and that we very strongly supported. We expect that the request for reconsideration will be acted on in the first quarter.

Parallel, in May of last year, we submitted a filing to FERC for our Montana transmission assets. In June, FERC issued an order accepting the filing granting interim rates effective July 1 for subject to refund and then establishing settlement procedures and terminating our related Tax Cuts and Jobs Act filing. Settlement judge has been appointed and then settlement negotiations and conferences are active. We expect to submit a compliance filing with the Montana Commission based upon eventual resolution of the FERC case with an adjustment and proposed credit back to our Montana retail rates.

We're continuing to invest in our transmission and distribution infrastructure. And this has been -- sometimes, this work is not as visible, but is incredibly important, fulfilling our responsibilities to our customers. That includes continuing work on a comprehensive-staged approach to infrastructure, addressing safety, capacity, reliability, really modernizing the system. We've been talking about that our progress along those lines, actually, since I've been at NorthWestern. On the natural gas side, pipeline investments, integrity verification pipeline and hazardous materials, on and on, a lot of good work there. And then grid modernization continues to be focus. We'd like to talk about deployment at the speed of value, learning what works and then making decisions that are sensible for our system and for our customers. One of the neat things, actually, just over the last couple of weeks, we've been on a multiyear process to create a distribution operation control center. And that started with geo coding elements in the field, acquiring spectrum, attaching communications to devices in the field, that went live just in the last couple of weeks. In the days after go live, we had wins in Montana, actually, on top of loan peak at Big Sky that hit 155 miles now. We had several hundred outages. It was truly the most challenging shake down crews that the distribution operations center could have had. They -- our folks in customer care and particularly, our people in the field, all tested an extraordinary job. The functionality of the DoC is going to continue to improve, increase over the next several years as we continue to turn on more technology and make investments there. Spend a couple of minutes on that just because it's an example of how investments that we consider to be very important, but that can be invisible to our customers, ultimately, really make a huge, huge difference.

As you know, we're planning to enter the Western energy imbalance market in April of 2021, based on our experience in the SouthWest power pool out of South Dakota that will produce some real benefits for our Montana customers with a lot more efficient use of intermittent resources, greater power and grid reliability. But then circling back to the Montana RFP, we have to have resources to be able to participate in that market.

As we've talked about before, we continue to monitor costs, including labor benefits, property tax valuations. We consider ourselves, I think, objectively, to be one of the most efficient companies in our peer group and really and post up well on most measures against companies larger than us.

Last thing, I'll draw your attention to is our capital investment forecast and what you see here over a 5-year period is $1.8 billion of total capital. We anticipate financing this with a combination of cash flows from operations, aided by NOLs through 2021, first mortgage bonds, equity issuances. Based on what we know now, any equity issuance would be late 2020, early 2021 and would be sized to maintain and predict -- and protect our current credit ratings. The significant -- potential significant capital investments that are not in these projections or negative regulatory actions could necessitate additional equity.

Just a couple of things to highlight. Based on the results of the South Dakota RFP, this does include $80 million of incremental investment for South Dakota generation in 2020 and 2021, but does not include any investment identified for generation capacity in Montana, and those -- depending on the results of an RFP, could be in excess of $200 million over the next 5 years.

One thing I would highlight, as you've heard us say before, as we work through any 5-year period, we identify more projects that are important to serve our customers. And indeed, if you just look at the period 2020 through 2023, in this bar graph there are about -- actually $222 million of investment more than you would have seen last year, and that's a result of the additional $80 million in generation in South Dakota. Also an important Montana electric transmission initiative, some additional funding in Montana AMI, gas transmission work in Montana, work at a billings substation, ongoing upgrades to the hydro system, and then, like so many other utilities, the investment in the (inaudible) project. So the point being that as you work through the 5 years, again, you identify the work that's most valuable and important to continuing to be able to serve our customers.

With that, we are open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Mike Weinstein with Crédit Suisse.

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

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Bob, Brian, could you talk a little bit more about why the RFP, I guess, final decision will be in the first quarter of 2021? What are the -- what's the extra, I guess, time required for that?

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

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It's going to be a very thorough process. We're through the prequalification process. There will probably be several stages of evaluation. So we believe and our supply folks, most importantly, believe that's a realistic and prudent schedule.

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

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Yes, expectation is that by this call next year, we'd be giving you an outcome.

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Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [5]

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Got you. And have there been any other changes to the process, though? Or is it the same process, just seeing more time with it?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [6]

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Well, we're following the process outlined in legislation passed last year in Montana. So that does include several steps that otherwise we wouldn't have -- and the legislation actually isn't in place. But for example, there, we've filed the RFP with the commission before releasing it for submission. So that's one extra step that does come in mind under the saturate that will be taking effect this year.

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Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [7]

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Right. And I mean, is the delay coming from you guys? You're saying that you need more time. It's not that somebody else is saying they need more time like the legislature or the commission itself.

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [8]

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No, no, I would not -- I don't think -- I didn't use the word delay at all. This is a reasonable schedule to work through it.

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Brian B. Bird, NorthWestern Corporation - CFO [9]

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We might have been aggressive on the front end in terms of fully understanding the time period, but working with the independent party revised our time period.

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

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Okay, got it. I was wondering if you could maybe talk a little bit more about the energy imbalance market. I think, Bob, you mentioned that the additional assets are required to join that and you're planning on joining it next year. Is there any time line that you have for additional assets that might need to be built? And what are we talking about here? Is it any significant investments that are required?

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

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Those would be the assets that come out of the RFP.

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Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [12]

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Okay. So you need to see that before you can join?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [13]

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Well, no, we're actively going through the steps to join right now. It's a very significant undertaking to get in place all the systems, hardware, software, people to be able to participate in the market, and that's a joint undertaking of our transmission department and our supply department.

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Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [14]

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Any -- yes.

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Brian B. Bird, NorthWestern Corporation - CFO [15]

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Mike, I'd just add, the capacity that we plan to build through 2025, certainly meets our needs from an EIM perspective. We or others, obviously, through PPA, depending on how the outcome of RFPs, but anything we don't have during the time that we're in EIM up until the end of 2025, we'll have to enter into contracts in order to achieve that.

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Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [16]

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Got it. And are there any transmission assets required that need to be built or any additional upgrades there?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [17]

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Not specifically for this. I mentioned we do have a couple of transmission projects underway.

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Operator [18]

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We'll take our next question from Julien Dumoulin-Smith with Bank of America.

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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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So just following up on where Mike was taking this a second ago. Timing of equity here, you specifically talked about this upside of $200 million. You also put in the slides here, 2020, 2021. Are you waiting to get some clarity about that process before kind of the deciding definitively on equity needs?

And also, when you talk about equity here, is that a definitive block equity? Or are you thinking about like an ATM process or something like that?

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Brian B. Bird, NorthWestern Corporation - CFO [20]

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I put 2 answer to your first question, Bob walked through the $222 million of incremental capital from the last time we talked from the slide. And when I talked about it on the last call, I was specifically talking to the $80 million, not the full $222 million and talked about having a need, the latter half of 2020 or into 2021. That's still the case. But again, we just need to size that debt according to needs and from a rating agency perspective, again, FFO to debt perspective. So that's really answering your first question. Your second question, we've used ATMs in the past, like them, that's certainly a possibility, but we'll evaluate other options as well.

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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 [21]

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Right. So basically, the -- whatever comes out of this current process in Montana that would be incremental later on, as you say in the slides, but that's not going to dictate the timing whether '20 or early '21, right, et cetera?

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Brian B. Bird, NorthWestern Corporation - CFO [22]

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Yes, that's a fair point, Julien. I think we'll need some equity prior to an outcome, I think, in terms of -- certainly building out anything, if we're fortunate enough to be successful in Montana. That would be certainly beyond the end of 2020, early 2021 time period. So that might be -- hopefully, that's an incremental amount of equity we're raising at some time in the future beyond.

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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 [23]

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Got it. Excellent. And then, Brian, did you say you expect to move to the middle of the 6% to 9% TSR range. And then to the extent, which I heard that right, can you clarify how you think about like a base year or anything like that? Sorry, I don't mean to read more into it than is necessary, but I also heard it. So I just want to make sure I heard it right here.

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Brian B. Bird, NorthWestern Corporation - CFO [24]

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I appreciate you giving me an opportunity to clarify it again. The main thing here is in 2020 and 2021, we're at -- we're now at about $400 million of capital investment. If we're able to sustain that type of increase, if you will, $400 million every year, I think you'd see our EPS growth rate improve, again, assuming reasonable recovery and thus, you'd see EPS plus a dividend yield, moving us more to the center of that 6% to 9% range. That makes sense?

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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 [25]

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Yes. Excellent.

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [26]

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Good job re-clarifying it.

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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 [27]

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Really no, I appreciate it. That's important. So a quick last little detail here. Maybe this is a Bob question. When you think about Colstrip and the various owners, how do you think about consolidating up further your ownership in that plant beyond what's contemplated today, broad-based?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [28]

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Yes, through RFP, we're looking for flexible, dispatchable capacity that would complement our other resources, including the PSE portion of Colstrip. So I think what we're looking for, again, is something that would -- in terms of serving our retail customers, something that would be complementary with a big emphasis on flexibility, dispatchability, particularly on an intra-hour basis. And then beyond that, we'll just see what's proposed in the RFP.

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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 [29]

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Okay. And said differently, you don't have a need for baseload coal like Colstrip?

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

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I'm comfortable with what we've acquired. And beyond that, we'll just see what comes in, in the RFP. But our focus is flexibility, dispatchability and risk management, I would add.

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Operator [31]

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Our next question from Shar Pourreza with Guggenheim Partners.

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Shahriar Pourreza, Guggenheim Securities, LLC, Research Division - MD and Head of North American Power [32]

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Let me -- can I just follow up on Julien's question? I guess, putting in a different way, if you're presented with a similar structure as you received with Puget, would you take on additional interest in Colstrip, especially as the partners kind of decarbonize?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [33]

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What I would say, again, is we're focused on resources that are complementary to the resources we have now in terms of ability to be flexible, operate on an intra-hour basis and then manage to diversify our risk as well. And I think you can read into that.

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Shahriar Pourreza, Guggenheim Securities, LLC, Research Division - MD and Head of North American Power [34]

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Got it. Okay, got it. And then, obviously, you did -- you've got the Colstrip deal, you issued the RFP for additional generation. Any sense on sort of the timing and the composition of the next RFP, as you think about the duration of your peaking needs?

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

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No, I think we'll work through this RFP, see what comes out the other end, focus on implementing that. And then based on conditions at that time, which will be obviously different in terms of size of the need, the economics, the technology that's available, but given the exposure that our customers have, right now, I don't think we can wait terribly long. The first thing is to get through this process, whatever the results are, get those resources engaged to serve our customers.

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Shahriar Pourreza, Guggenheim Securities, LLC, Research Division - MD and Head of North American Power [36]

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Got it. And then lastly, it's helpful as you've just sort of highlighted the complaint around the FCRM pilot program. Is there any -- just remind us if there's a statutory deadline? I know you expect a decision, but is there a statutory deadline for Montana PSC to issue a decision on the petitions?

And then Brian, this is maybe a little bit for you. Even if you sort of get a scenario whether there's a 25 basis point reduction in the earnings and the ROE, is there sort of an earnings impact, given the fact that you do under earn in Montana?

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Brian B. Bird, NorthWestern Corporation - CFO [37]

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Yes. First of all, I think just to clarify that we spoke about earlier. I think just the MCC is the only party that ask for reconsideration associated with the FCRM and the 25 basis point. Everyone else -- I shouldn't say everyone else, but most parties that certainly commented on that certainly support moving forward with that without any impact on the ROE, and we hope that, that's where the commission will come down again in that regard. So I'm pretty confident we'll get there, but we'll see. I think the other thing I'd say is it would be an impact, of course, to our earnings. And regardless if we're earlier or under earning, I think it's going to have an impact if, in fact, we're deemed in any way, not an ROE perspective. And so I'd just leave it at that.

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Shahriar Pourreza, Guggenheim Securities, LLC, Research Division - MD and Head of North American Power [38]

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Got it.

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Brian B. Bird, NorthWestern Corporation - CFO [39]

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The proposal, I thought was maybe the best decoupling of fixed cost proposal I've seen anywhere and was an extremely forward-looking step by the Montana Commission. I think that testimony really eviscerated any kind of an argument for an ROE adjustment. But then beyond that said, if you really think this is something to look at, that's something that can be evaluated as part of the subsequent study. So I certainly hope the commission sticks to its guns. And there were a number of very good responsive readings from other interveners opposing the request for reconsideration.

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Shahriar Pourreza, Guggenheim Securities, LLC, Research Division - MD and Head of North American Power [40]

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Got it. That was helpful.

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Brian B. Bird, NorthWestern Corporation - CFO [41]

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I think one thing, too, in terms of the timing, I think we're going to need to get an outcome pretty soon on that because we're supposed to implement that program by July 1. And so we hope to hear something relatively soon on that.

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

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Just 1 more little footnote following on to implementation of the order. There was also good action by the commission approving what we're referring to as our green pricing stipulation. So Bobbi Schroeppel, our Vice President for Customer Care and quite a good group of stakeholders are actively working on approaches to develop green products that our customers actually want to buy, and we think that's very responsive to what we're hearing from both large and small customers and from some of our cities.

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Operator [43]

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We'll take our next question from Jonathan Reeder with Wells Fargo.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [44]

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Just kind of following up on that comment there, Bob, in your prepared remarks, it kind of sounded like in the RFP based on some of the desire for kind of green products that we might expect some renewables to maybe clear this first RP? I mean, is that kind of fair?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [45]

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Very honestly, we don't know what will come out the other end, and what will ultimately be expected, given the number of parties who are bidding in. I expect we'll see some real diversity in proposals and as we think about our resource needs, we think about it really as a pyramid the base, long duration, dispatchable resources and then building up the pyramid dispatchable resources a shorter duration. So that potentially creates an opportunity to acquire some diverse resources through the process. But the foundational need is going to really be long duration, dispatchable resources.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [46]

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Okay, that's helpful. And then, Brian, just to confirm the FFO to debt ratio that you guys still target, is that 15%?

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

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We target 15%. I think the clearing is really 14%. We'd like to have some cushion in our FFO to debt.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [48]

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Okay. And then lastly, the higher T&D CapEx spend is now in your budget. How does that impact the potential cadence of rate case filings as well as any rate affordability concerns for your customers?

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Brian B. Bird, NorthWestern Corporation - CFO [49]

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Great question, Jonathan. I think twofold, we'll obviously -- as that spend -- and that was a $223 million that Bob talked about, that's spread across those 4 years. I would say this. It could move things, accelerate things a little quicker. We have said in the past that we expect to file a bit more frequently, certainly than we have in the past, and we'll let you know that in April in terms of our time line, if you will, at least for 2020, if there's any filings. I think the other thing, too, is we expect during this time period, particularly when we get into EIM, that's going to help reduce any bill headwind. In any time we think about our long-range plans, we're trying to increase to customers at less than inflation.

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [50]

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The one thing I'd add to that is, of the $222 million, part of it is South Dakota, part of it's Montana, part of it's electric, part of it's gas. So on anyone business segment, the increased capital is just that much more modest.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [51]

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Yes. No, it looked like you guys did kind of spread it across the field pretty well.

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Operator [52]

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We'll take our next question from Vedula Murti with Avon Capital.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [53]

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In terms of the pending RFP here in Montana, do you have -- is there a rate -- in the past, it's been difficult for you to be able to come up with self-owned proposals that managed to be able to effectively compete or be able to cross to finish line with the Montana PSC and the independent evaluator. Yet in South Dakota, you were able with the brownfield site to have a unique situation where it actually did work that way. In this current RFP, do you have any particular new opportunities or advantages that could produce perhaps a better outcome or the likelihood of a self-owned option more so than maybe than it has been in the past?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [54]

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But could you point me to the RFP you're referring to? I'm drawing a blank.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [55]

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The ones in the past where you wanted to have your self-owned options and you haven't been able to get the PSC or whoever to validate having your self-owned options in Montana?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [56]

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I truly can't think of an example. What I -- I wonder if what you're referring to. Coming out of the 2015 plan, we undertook an RFP, and we withdrew it because of noise at the commission really unrelated. If you recall, that was when commissioner at the time, came up with a reasonable idea that QF contracts ought to be limited to 15 years but that under a notion of symmetry resources coming out of the RFP, whether owned by us or anybody else, also ought to be limited to a 15-year period.

So as a result of that separate action by the commission. We ultimately ended up withdrawing the RFP because we requested 20-year proposals. I wonder -- could that be what you're thinking of?

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [57]

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Yes. Perhaps in this case, I guess, just maybe ask a little differently then. Given your success in South Dakota, are there -- do you feel like in this new process there are things that you have advantages in terms of what you'll be able to propose that may perhaps increase the probability of being successful, at least in terms of part of solicitation. And in addition, does the Colstrip acquisition per $1 actually perhaps influence at all the shelf-owned viewpoint, given you're not going to be able to fine-tune too much more capacity for $1?

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

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Certainly agree with that statement. I think we will participate in the RFP. Obviously, we think we are good at building and operating resources. And we think there are real customer benefits to having us do that. So we're going to participate, but the proposals from all parties will be evaluated on a neutral basis by a third party, really through a blind process.

In terms of relationship to Colstrip, the relationship I would see is that we did at least defer about 1/4 of our customers' exposure through that very cost-effective transaction. We think that was the right thing to do for our customers. And also, we think that was a pretty progressive move in terms of thinking about eventual closing costs and creating a situation where the ultimate decision about disposition of Unit 4 is going to be based either on the economics at that unit or on a public policy decision in Montana and not somewhere on the coast. But beyond that, I really don't see a relationship between Colstrip and the RFP. Brian, do you say anything?

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Brian B. Bird, NorthWestern Corporation - CFO [59]

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Yes, I think we, obviously, know the service territory that we operate in and have built resources and asked for pre-approval and received approval on resources we put into our portfolio in the past, and we plan to compete. That's all, I guess I'd add, Bob.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [60]

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Okay. And I want to make sure I clarify one thing as Julien asked the question in terms of when you're running -- make sure I understand. There's probably the $400 million -- if you were to sustain a $400 million capital expenditure level, when we're talking about the midpoint of the 6% to 9%, given that you're at a 3% yield, the inference is that the $400 million cap -- at a $400 million CapEx run rate that, that would imply about a 4.5% earnings CAGR as part of your 6% to 9%. Is that fair characterization?

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Brian B. Bird, NorthWestern Corporation - CFO [61]

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That is the approximate math if you use that 3% flat dividend yield, correct? And I think the reason for sharing that is, historically, we have said in the past, in light of the lower growth and investment in some of the outcomes we had been receiving, we expect it to be on the lower end of that 6% to 9% range. That we're certainly pleased in terms of being able to invest capital, including the $80 million that we're investing in South Dakota. I think Bob pointed out projects that we -- throughout our service territories, both electric and gas, certainly to our customers' benefit, but that higher level of investment allow us to move up within that range.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [62]

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And also to clarify also the equity question. Given the timing you laid out towards early 2021, which also lines up with the outcome of the RFP process in Montana, is there any reason not to simply wait to find out what that outcome is in terms of figuring out whether it be an ATM program? Or maybe whatever the sizing is and that type of thing and with the agencies, do you feel like you'd have time to effectuate that if you have an idea of what the outcome is?

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Brian B. Bird, NorthWestern Corporation - CFO [63]

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Yes, I think it's a fair question. I think, obviously, one of the benefits of an ATM program, you could size that if, in fact, you -- let's say, you weighted into the first quarter and you knew an outcome from that, you could certainly size that and utilize that over time. It's certainly something to think about. We just wanted to make sure we gave people the impression of the timing around an equity raise and. So something certainly to think about, Vedula.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [64]

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Okay. And just in terms of if we're running at a $400 million CapEx program, given your cash flow profile in order to keep -- maintain a balanced capital structure, should we be thinking at that point in time that something in the $100 million to $200 million kind of area is -- will it be required to maintain the capital structure?

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Brian B. Bird, NorthWestern Corporation - CFO [65]

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Vedula, I think people all run their various models. And I think they probably have in their models an FFO to debt calculation for us. That's what we're really trying to get you to do is, from your perspective and a modeling perspective for you to size that equity. We're not going to provide you what we believe that is at this point in time.

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Operator [66]

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(Operator Instructions) We'll take our next question from Brian Russo with Sidoti.

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Brian J. Russo, Sidoti & Company, LLC - Research Analyst [67]

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Just on Slide 38, the rate base and authorized returns, just remind us your thought process here.

You're currently earning on $3.4 billion of rate base, but your actual estimated rate base if you kind of trued up outside of the historical test years is $3.8 billion. Is that the way to look at, so that delta will -- that the roughly $400 million will be need to be recovered in future rate cases?

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Brian B. Bird, NorthWestern Corporation - CFO [68]

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That's correct. The $3.8 million is a future rate case perspective. If it all happened on a particular date today, we would be earning on the $3.873 million, currently earning on the $3.4 million today.

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Brian J. Russo, Sidoti & Company, LLC - Research Analyst [69]

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Okay. So -- and the timing of these upcoming rate cases is to be determined. And like you said, maybe after your first quarter call in April?

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

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That's when we give you an indication of what we plan to do in 2020.

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Brian J. Russo, Sidoti & Company, LLC - Research Analyst [71]

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And South Dakota, for recovery of the peaker plant, are you going to pursue the general rate case route or file for a tracking mechanism?

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

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Yes, we're going to pursue that the rate case. I think the timing of that will be determined whether we can get a known and measurable adjustments. So the timing of that will also require us to have some conversation with the commission. And regardless, while we're making an investment in that, and we -- I said, we don't have a rate case, we certainly would have AFUDC during that time period.

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Brian J. Russo, Sidoti & Company, LLC - Research Analyst [73]

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Okay. So would this be like a one-off rate case? Or would you seek recovery of the difference between $606.6 million and $557.3 million, which was the authorized bank in December of $15 plus the $80 million for the peaker? Is at a...

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Brian B. Bird, NorthWestern Corporation - CFO [74]

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I think it would be all in, it would be all in. And potentially -- if it was primarily, as you can see from the schedule you're looking at, it's primarily on the electric side, where we have that needed, and obviously, the generation units on the electric side. So if we have a rate case from a South Dakota electric perspective, we're not just going to do the $80 million of investment in the plants. It's going to be for all of our South Dakota electric business.

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Brian J. Russo, Sidoti & Company, LLC - Research Analyst [75]

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Got it. And then just to clarify or remind us the peaker plant in South Dakota being built in Huron, South Dakota. Was that -- is that at an existing generation facility? Or is it just that some sort of industrial site that has easier access to transmission?

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

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That is our site.

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Brian J. Russo, Sidoti & Company, LLC - Research Analyst [77]

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It's your site?

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Brian B. Bird, NorthWestern Corporation - CFO [78]

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Yes.

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Operator [79]

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We have no more questions in the queue at this time.

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [80]

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Okay. Great. Thank you all very much for your interest and support. We'll see quite a few of you over the next 2 months and hopefully be visiting with all of you in April. Take care.

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Operator [81]

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This concludes today's call. Thank you for your participation. You may now disconnect.