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Edited Transcript of NWE earnings conference call or presentation 24-Jul-19 7:00pm GMT

Q2 2019 NorthWestern Corp Earnings Call

Sioux Falls Jul 26, 2019 (Thomson StreetEvents) -- Edited Transcript of NorthWestern Corp earnings conference call or presentation Wednesday, July 24, 2019 at 7:00:00pm 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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* Christopher Ronald Ellinghaus

The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas

* Jonathan Garrett Reeder

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Michael Weinstein

Crédit Suisse AG, Research Division - United States Utilities Analyst

* Ryan Greenwald

BofA Merrill Lynch, Research Division - Associate

* 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 Second Quarter 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, Christina. Good afternoon, and thank you for joining NorthWestern Corporation's Financial Results Conference Call and Webcast for the Quarter Ending June 30, 2019. 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 today with us are Bob Rowe, President and Chief Executive Officer; Brian Bird, Chief Financial Officer; and other members of the management team in the room with us to address questions, if needed. Before I turn the call over for us to begin, please note that the company's press release, this presentation, comments by presenters and responses to your questions may contain forward-looking statements.

As such, I will remind you of our Safe Harbor language. During the course of this presentation, there will be forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often address our expected future business and financial performance and often contain words such as expects, anticipates, intends, plans, believes, seeks or will. This information is presented 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. These factors that may affect our results are listed in certain of our press releases are disclosed in the company's Form 10-K and 10-Q, along with other public filings with the SEC. Following our presentation, we will open the phone lines to allow those who are dialed into the teleconference to ask questions. The archived replay of today's webcast will be available for 1 year beginning at 6:00 p.m. Eastern today and can be found on our website at northwesternenergy.com under the Our Company, Investor Relations, Presentations and Webcast link.

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

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

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Thank you very much and thank you all for joining us today. We're speaking with you from Bozeman, Montana. Bozeman is one of the most -- the Bozeman area, including Bozeman, Big Sky and over down towards Yellowstone Park and the Paradise Valley, one of the most rapidly growing areas anywhere. 2 nights ago, we had a tremendous community event, our Board members and community leaders. Lots of discussion about the partnership in growth in this area and responsible approaches to growth and truly is a great partnership. Also lots of appreciation for our employees' volunteer activities in Bozeman, which is true across the company, in fact on Friday, coming back over to help with a trail mill. Tomorrow, a number of our Board members are going down in the Yellowstone Park to meet with our crews who serve that area. And whenever I'm meeting with those folks, I remind them that the 5 million people who go through Yellowstone every year couldn't have the experience they do after the launch of the service that our employees provide.

Turning to second quarter highlights. Our net income for the quarter increased $3.9 million, 8.9% as compared to the same period last year. And this increase was mainly due to the income tax benefit in 2019 and a reduction in revenue in '18 due to impacts of the Tax Cuts and Jobs Act for customer refund.

And these improvements were largely offset by lower gross margin due to the adjustment of a qualifying facility liability and also mild spring weather, along with planned higher operating expenses.

Diluted EPS increased $0.07 or 8% as compared to the same period in 2018. In May, we reached a settlement with all parties who filed comprehensive revenue requirement, cost allocation and rate design testimony in our Montana electric rate review. If the Montana Public Service Commission approves this settlement, it will result in an annual increase to electric revenue of approximately $6.5 million and that's based upon 9.65% ROE and rate base and capital structure, as we filed as well as an annual increase -- a decrease in depreciation expense of approximately $9 million. The Board of Directors declared a quarterly dividend of $0.575 per share payable September 30 to shareholders of record as of September 13. And with that, off to Brian.

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

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Thanks, Bob. I have to note that the second quarter, though it's a shoulder quarter or definitely our smallest quarter during the year, it did have a lot of moving parts.

I'd first point out on this page, it shows the summary financial results for the second quarter. Our gross margin was down $14.6 million or 6.4%, primarily as a result of a lower QF benefit on a year-over-year basis.

Our operating expenses were up in total $5.8 million or 3.6%. The OG&A, I think higher pension, higher hazard trees, things that we've forecasted to be higher in '19 versus '18. Plus, we have scheduled maintenance, that being offset to a degree by the lower depreciation Bob mentioned earlier. Those things netted to lower operating income on a year-over-year basis and pretax income.

Finally, we did have much lower income taxes, $25.3 million lower income taxes primarily as a result of a release of unrecorded tax benefits, resulting in total net income increase of $3.9 million or 8.9%.

Moving on to more detail on gross margin. Total gross margin was $215 million. $14.6 million in the prior year period, or as I mentioned earlier, down 6.4%. Nearly all of that decline was in the Electric segment. Decrease in gross margins due to the following factors, really 3 drivers, the primary drivers, if you will: The QF liability adjustment. Again, a smaller QF liability adjustment benefit in 2019 versus 2018. That's partially offset by the Tax Cuts and Jobs Act impact. If you think of it this way, there were no revenue deferrals associated with TCJA in 2019 versus 2018's deferral.

And the other offset the Montana electric supply cost recovery, think of that primarily as the result of the elimination of the deadband within the PCCAM and so recording that benefit for the quarter. That and some other items led to change in gross margin of approximately $14 million. We do have some other items that impact gross margin but are offset within net income as a whole, totaling $600,000 for a total decrease of $14.6 million for the quarter.

Moving on to weather. As Bob mentioned earlier, we did have a mild Q2. You do, it's the quarter where you have both heating degree and cooling degree days. To point out, from a heating degree day, we had very little heating load during the quarter. And for all intents and purposes, particularly since Montana has -- doesn't have the same air conditioning load as you expect a lot of States, we really effectively had no cooling load whatsoever.

And as a result, again, second quarter is shoulder and it's always our lowest loads for the year. To some weather, we did estimate unfavorable weather in Q2 2019, resulted in a $300,000 pretax detriment and that, as compared to normal. And then a $1.1 million pretax benefit as compared to Q2, 2018. So think of 2019 as a little less worse weather than 2018.

Moving on to operating expenses. Operating expenses were $166.1 million or $5.8 million or 3.6% higher than the prior year period. In the operating, general and administrative expenses, they were up $7 million or 9.5%. I'll discuss that a little bit more below.

Property taxes were up slightly, primarily due to additional additions BP&E. And depreciation and depletion were down $2.5 million, as a result primarily the adjustment consistent with the proposed settlement in our Montana electric case.

A little more detail on the OG&A expenses. We did have $3 million, up $11.2 million of change in OG&A that impact net income. $3 million of that was generation maintenance expense. All of that was all planned maintenance that did -- that occurred in 2019, that didn't occur in 2018, thus the increase on a year-over-year basis. As we discussed, we're certainly spending more on hazard trees and we're spending more on employee benefits, primarily pension, in that regard.

And just to remind folks, we've made it clear, from a trending perspective that we do expect to have $4 million more pension expense in 2019 versus '18 on a full year basis and $4 million to $6 million more hazard tree expense in 2019 versus 2018. Those items I mentioned maintenance -- generation maintenance expense, hazard trees, employee benefits are primary drivers of that $11.2 million. We do also have items that change OG&A, but they are offset elsewhere within the P&L, leaving us to the net impact of the $7 million increase in OG&A. Moving on to operating income. I mentioned that's down. That's down $20.4 million or 29.5%. Below that interest expense, up slightly primarily due to higher borrowings. Other income, there's some moving parts there. Obviously, we mentioned the slight change due to the deferred comp and pension, offset and OG&A and those items were partly offset by AFUDC during the quarter.

And that gives us a pretax income down $21.4 million or 45.6% for the quarter. Below that, they will get an income tax benefit, the $25.3 million. And again, that's primarily driven by the $23.2 million of unrecognized tax benefits recorded during the quarter. And I'll talk about tax reconciliation on the next Page.

And regarding that, you see the $25.3 million benefit at the bottom of that page on a year-over-year basis. The primary drivers, of course, we talked about the unrecognized tax benefit of $23.2 million, but we also did have lower pretax near the top of the page for $4.5 million benefit there.

Those are partly offset by lower flow through and production tax credits for the quarter. I would acknowledge that those items are relatively close on a year-over-year basis -- on a year-to-date basis. Last thing I'd just say about income taxes. I may have seen in 10-Q that we are expecting negative 7% to negative 12% ETR on a GAAP basis for the year, and we also reiterate the 0% to 5% ETR on a non-GAAP basis for the year.

Moving forward to the balance sheet. Little change to the balance sheet on a year-to-date basis. PP&E is up approximately $100 million and think of that being offset liabilities and equity about $50 million increase to debt and $50 million increase to shareholders equity. At the bottom of the page, we had -- did have a slight reduction in our debt-to-cap on a year-to-date basis.

Moving on to the cash flow statement. We did see a significant decrease, if you will, a cash provided by operating activities on a year-over-year basis, almost all driven by changes in working capital. We do good job to the right to identify what those big drivers are. But again, approximately, 80% of that change in the $100 million of reduction in working capital, $80 million of that is -- $39 million is really a swing from an overcollection position in 2018 to an undercollection position in 2019. We also had to refund the customers approximately $20 million associated with TCJA, that was in the beginning of 2019, so on a 6 months year-to-date basis. And then lastly, we have been providing folks that interconnect to our system that make deposits as they -- those QFs come in line, we refund those deposits that was approximately '19 on a year-to-date basis. So there was significant change there. We did also have a higher PP&E additions during the quarter and those items were funded by certain issuance of debt, higher than we had in the prior year basis.

Moving forward to adjusted non-GAAP earnings. Very quickly, what were the items in -- for the quarter in 2019, we had slightly unfavorable weather. We talked about that effectively. $0.01 associated with unfavorable weather, but we did remove $0.45 associated with the unrecognized tax benefit, and so moving from $0.94 to $0.50. That comparative to a prior year period where we had unfavorable weather and the QF gain, where it went from $0.87 to $0.63. So comparatively, $0.50 down from $0.63 on a non-GAAP basis for the prior year.

One thing I'd point out, primarily for the quarter, though results on a non-GAAP basis are down on a year-to-date basis -- for a year-over-year basis, excuse me, we are actually quite pleased with our results on a year-to-date basis. Those are relatively flat on year-over-year basis.

We do anticipate certainly on year-end to manage results to provide a total shareholder return expectations that we've communicated to the street. I'd also say we've got good progress, certainly on a PCCAM release and great legislative outcome there. We've had good progress on the rate case. We've been addressing hazard trees and the pension expense and the expenses we certainly need to go after. And I feel really good about the quarter as a whole and certainly, where we sit year-to-date as a whole. And with that, I'll give it back to Bob.

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

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Thanks, Brian. And just following up on the point where Brian left off, I'll give you a preview of some of the things we're working on and then I will have you ask questions after that.

Regulatory front, of course, the last 2 months have been all about the Montana electric rate review. Although, we did reach a settlement with the major interveners and settlement involved an increase to revenues of $6.5 million based upon a 9.65% return on equity coupled with a decrease in depreciation expense of $9 million. And we expect final order from the Commission during the fourth quarter.

In May, we submitted a filing with the Federal Energy Regulatory Commission for our Montana transmission assets. In June, the FERC issued an order accepting the filing and also granting interim rates effective July 1 for subject to refund and the established settlement procedures as well as terminating our related Tax Cuts and Jobs Act filing.

As you know, the FERC has a robust settlement process. A settlement judge has been appointed. We expect the first settlement conference to take place in early August. As Brian mentioned, on the legislative front, we actually had a very successful legislative session in all of our States, but particularly, in Montana. And there, our real focus was trying to bring the legislative electric supply tracker to back in line with what the legislature had really intended in 2017. And in fact, the legislature did revise the cost recovery statute to prohibit deadband and to require 100% recovery of qualifying facility purchases as well as a 90% customer, 10% shareholder, overall, sharing of costs above or below an established baseline.

We continue to invest in our transmission and distribution infrastructure. I mentioned, the growth we're saying, particularly in our Bozeman division, that is certainly a part of it. But more generally, both the gas and electric side were investing to ensure safety, capacity and reliability. In addition, on the natural gas side, pipeline investments are driven by safety, compliance requirements. We take those very seriously. And then finally, grid modernization and resilience that includes an advanced distribution management system and advanced metering infrastructure.

And on the advanced metering, we have a deployment underway in South Dakota and Nebraska, essentially moving from North to South. And based on that, we will, in the coming years, shift to a deployment in Montana. Very, very big undertaking jointly between our electric supply and electric transmission teams is moving into the Western Energy Imbalance Market. And you see the map of the Western participants on Page 13 of the deck. Challenge for us was, as we've discussed over the months, we sit on the far-eastern edge of the Western interconnect and we needed to make decisions that were appropriate for our customers and for our system, but we do see significant benefits to our customers from moving into the Western market.

And then of course, ongoing cost control, electrics monitor and costs, including labor benefits property tax. And as Brian mentioned, we made several important commitments over the last few months that we think are appropriate over the long-term pension and building on already very robust efforts to deal with vegetation management.

Turning then to energy supply resources and other critical responsibility, our South Dakota Electric Supply Plan is well into implementation. The plan was published last fall.

Focusing on modernization of the fleet to improve reliability, flexibility and to maintain compliance with our obligation in the Southwest Power Pool. And Montana and South Dakota are nonelectrically interconnected. Over the last several years, we've moved into SPP. And we're not really seeing benefits there, but in significant part, our South Dakota plan is focused on meeting the compliance requirements in SPP, but also being able to get the real benefit on a full participation.

So the plan identifies 90 megawatts of existing generation that should be retired and replaced over the coming decade. On April 15, we issued a request for proposals for 60 megawatts of flexible capacity to sort South Dakota in the online by the end of 2021. Responses are due actually by the end of this week. And using the third party, we'll be evaluating proposals with outcomes determined by the end of the year.

Montana electric supply plan. A draft was released in March. We will be finalizing that in the third quarter.

So an extensive comprehensive documents and off a lot of input, a very good analysis went into that. The plan supports the goal of developing resources that will address the changing energy landscape in the west -- Pacific Northwest and specifically, in Montana, and that landscape is changing rapidly. We have plenty of energy. We are severely challenged in terms of meeting capacity needs.

And that's true throughout the Northwest driven in significant part by plant retirements.

It's doubly or triply true that in Montana because we have still a negative 27-or-so percent capacity margin, we're the only -- we continue to be the only electric company in the West with a negative margin.

And in part, that's a result of continued legacy from deregulation and divestiture in the late 1990s.

We made a lot of progress in really communicating the exposure that our customers face during peak times in the summer, during peak times in the winter. And the analysis that our supply department is undertaking emphasizes that the risk is a price risk. And we see that when we are in the market on behalf of our customers during periods of peak. But increasingly, with plant retirements and growth in peak demand, it is a reliability risk as well.

So currently, 630 megawatts short of peak. We're in the market to procure that. But even with strong assumptions around growth and efficiency and alternate delivery models, we got conservative estimate is that we could be 725 megawatts short really in very few years, 2025.

So we expect to file the plan in the coming weeks. We will continue to communicate with our customers and decision makers about the approach in the plan, the identified need and the risk. And then we will move to the first of several all-source proposals late in this year seeking peak capacity to be available by the end of 2022.

And I emphasize, again, that it will be for any resource, any kind of resource to meet our customer's need.

We expect, just as we did in South Dakota, we would use a -- an independent third party to conduct the RFP. As a result of the fact that there will be an RFP and we'll grow the [ideas] in South Dakota, we haven't included this associated capital investment in the 5-year forecast. But obviously, these additions could increase our capital spending over that 5-year horizon.

And turning to the capital forecast, we anticipate $1.6 billion total capital over the 5 years, continue to be funded with the combination of cash flows supported by NOLs that will be available now through 2020 as well as long-term debt issuances. As we say, every quarter, it seems significant capital not included in the above projections could -- or further negative regulatory actions, either one could necessitate additional equity issuances.

The point of the 5-year capital forecast is to continue to meet the needs of our customers for safe, reliable service, adequate capacity to meet their needs today and in the future. And as always, you see over time, the identified capital projects really corporately distributed by jurisdiction and by function as well. With that, we will open it up to your 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 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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Sorry, if you covered this before, maybe I missed it. But on Colstrip, Unit 3 and 4, you understand, your negotiations with Westmoreland over coal pricing, I'm just wondering what the status is at? Like, we know -- when do you think you'll have something locked down, you'll be able to say that, that plant is going to be operating?

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

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I'd say we're in a good position in terms of reaching a final whole contract that's based on either constructive discussions with the other owners and also, a very constructive approach that the management -- new management at Westmoreland is pursuing. So we feel actually quite good about being able to announce a coal contract in the near future.

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

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Got it. And also on the unrealized tax benefits this quarter, are there any other situations that are similar to that? Or awaiting a statute of limitations to expire going forward?

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Brian B. Bird, NorthWestern Corporation - CFO [5]

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Well, you noted, we reached out $35 million noted, but there is no timetable associated with that. If, in fact, there is a timetable, you usually talk about that a year in advance of anything like that and you'll -- as you see the language, we don't have any language associated with anything in the near future.

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Operator [6]

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

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Ryan Greenwald, BofA Merrill Lynch, Research Division - Associate [7]

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It's actually Ryan Greenwald on for Julien. So as you guys progress with the plans in South Dakota and Montana, I know you're still seeing at least $200 million in opportunities, but are you able to provide a little more color on the cadence around potential investment?

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

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No. Not really. And there are actually the RFP as we've discussed, administered via third party, the focus is on meeting the identified needs. And I really don't think we can say anything more than that at this. Certainly, we will be able to share more detail over the coming months.

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Ryan Greenwald, BofA Merrill Lynch, Research Division - Associate [9]

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Fair enough. But would you be eligible to own the whole amount potentially?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [10]

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I would say we will have the opportunity to participate in the RFP, and we expect we'll be putting forward very solid proposals.

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Ryan Greenwald, BofA Merrill Lynch, Research Division - Associate [11]

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Got it. And I guess to set a little differently with respect -- with regards to Montana, you said that the 725 megawatts is conservative. How high could that potentially go?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [12]

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Well, I just -- I didn't even want to speculate on that, that we've got such a big hole to climb out of. I think that needs to be the focus. And the point I was making was that, we were making assumptions about continued success with things like energy, efficiency programs.

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Ryan Greenwald, BofA Merrill Lynch, Research Division - Associate [13]

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Got it. And then just lastly, in terms of the Montana supply plan, it anticipates Colstrip remains supply source, right?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [14]

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Correct.

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Ryan Greenwald, BofA Merrill Lynch, Research Division - Associate [15]

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What's the contingency plan if a new supply contract can't be reached?

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

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Right, a new coal contract?

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Ryan Greenwald, BofA Merrill Lynch, Research Division - Associate [17]

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Yes.

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [18]

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Well, at this point, we're feeling better and better, as I mentioned, that we will reach a good outcome on the coal contract.

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Ryan Greenwald, BofA Merrill Lynch, Research Division - Associate [19]

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Got it. And if I could just ask one more. With regards to the tax rate, you guys are saying 0% to 5% and then, gradually increasing the 10% to 11% in 2023? Is that still a kind of the current trajectory? Or is that changed?

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

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Yes. By 2023, as you said -- that's what you said, correct? Is up by around 10% by that time period. Yes.

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Operator [21]

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And we'll take our next question from Chris Ellinghaus with Williams Capital.

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Christopher Ronald Ellinghaus, The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas [22]

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Brian, I believe you said that you decreased depreciation and amortization by $4.5 million. I assume that is inclusive of your sort of pro rata portion for the first quarter as well?

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Brian B. Bird, NorthWestern Corporation - CFO [23]

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It is. It is from a year-to-date basis where we said from a depreciation perspective.

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Christopher Ronald Ellinghaus, The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas [24]

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Okay. As far as the supply cost recovery for the quarter, it -- that's not all entirely from the second quarter? That includes some prior period recovery, I assume?

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

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You're speaking to the deadband recovery itself?

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Christopher Ronald Ellinghaus, The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas [26]

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I think -- hang on, let me see if I can find the numbers. $4 million, $4.5 million or something like that? $4.6 million?

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

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Yes. We look at -- when we recorded, obviously, the deadband impact was in the 2018. We looked that the deadband is from a tracker period from 7/1/19 to [6/30/18 to 6/30/19]. And so from our perspective, last year, we had no adjustments associated with PCCAM on a non-GAAP basis and this year, we have no adjustments to -- from a PCCAM on a non-GAAP basis.

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Christopher Ronald Ellinghaus, The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas [28]

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Okay. Great. Bob, as far as the RFP goes for Montana, I assume you don't want to talk about what the capacity number is, but can you give us any kind of sense of what proportion of that 630 megawatts is that equates to your $200 million of CapEx potential?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [29]

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Well, I would be uncomfortable going there, but I understand what you're asking.

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Christopher Ronald Ellinghaus, The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas [30]

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Yes. I'm basically trying to figure out how much that leads to. And then the $200 million is just a 5-year horizon. And sort of, if I recall the draft supply plan, there is a good piece that comes at -- right after the 5-year horizon, if I'm not mistaken, is that right?

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Brian B. Bird, NorthWestern Corporation - CFO [31]

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Yes. The $200 million is associated with the 5-year. And just -- Chris, I just want to make sure we're talking past each other. The $200 million we talked about is both in Montana and South Dakota, just to be clear.

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Christopher Ronald Ellinghaus, The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas [32]

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Yes. Yes. But you gave us the 60 megawatts for South Dakota. So you can back into the rest. But I think the supply draft, there was another piece coming in 2025, if I remember correctly? A bigger piece.

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Brian B. Bird, NorthWestern Corporation - CFO [33]

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You're saying from Montana's perspective or South Dakota now?

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Christopher Ronald Ellinghaus, The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas [34]

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Montana.

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Brian B. Bird, NorthWestern Corporation - CFO [35]

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Yes. I think you're going to see, in both places, we're going to have significant amount of investment in Montana, certainly by 2025. And that full 90 megawatts that we talk about in South Dakota, should be drawn there shortly thereafter.

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Christopher Ronald Ellinghaus, The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas [36]

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Okay. If it wasn't for your capacity needs and just the changing dynamics in the region, would you have any -- I don't know what's the right way to say it, is -- you don't have any reason why additional renewables aren't in your draft plan other than the current specific capacity needs? You would be interested in additional renewables when you've set your capacity equivalency requirements in the future?

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

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The plan doesn't identify any particular resource and to meet the word renewable is a little bit slippery. As you know, in Montana, existing high-growth isn't a renewable. So I think rather than a label, I would focus on the attributes of the resource. And you could include environmental attributes. As you know, we -- in the Montana plan, we have various carbon-related scenarios too. But obviously, in terms of the conventional renewables, solar and wind, there's a lot on or poised to come on our system through the QF process.

And then more broadly, in terms of our portfolio, in Montana, right now, we're 70% carbon free. And a lot of the resources we have in the Montana portfolio online in Montana provide little or no benefit to help us meet our peak. The hydro system obviously does.

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Operator [38]

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And 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 [39]

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A few things here just to make sure I understand. One, given the difference between the interim rates that was granted and the settlement amount, are you reserving the difference? Or you're simply booking only the settlement amount in revenues as you're in the fashion like you're recognizing depreciation expense that's reflected in the settlement?

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

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We're counting estimate is at the $6.5 million, not the interim rates. The $6.5 million stipulated with the parties associated with the rate case. They were booking to that level, not renewable rates.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [41]

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Okay. So then -- so okay. So while there will be a true-up on a cash basis on a financial statement basis, you're already reflecting the lower settlement amount?

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Brian B. Bird, NorthWestern Corporation - CFO [42]

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Correct.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [43]

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Okay. When you talk about sources and uses of cash per CapEx, you say specifically about the heated by NOLs available into 2020. What happens as -- when -- can you remind me the amount of NOLs that are available right now in '19 and '20 as part of sources that will not be available on a go-forward basis then?

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Brian B. Bird, NorthWestern Corporation - CFO [44]

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Well, we'll get you that number in a second, Vedula, but yes, we do plan to aid through our NOLs at that point in time is noted. And we continue to try to manage our taxes as best we can to minimize our taxes. But I'll get you that number in a moment.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [45]

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Okay. You talked about the legislative section and the successes there. Especially with the QF recovery and the 90%, 10% on power costs. If we look forward in the second half of this year, if you're recovering full out QF recovery, is there a benefit or is there a benefit that you'll see over the second half? Because you didn't recover last year when we see variances?

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Brian B. Bird, NorthWestern Corporation - CFO [46]

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Could you repeat that question? First of all, I'll answer your NOL question. It's $257 million that's left, but could you repeat that last question?

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [47]

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The last question was now that you're able to fully recover QF-incurred costs, if we look forward to 3Q and 4Q, if you're recovering 100%, is there a benefit to you for in the comparisons? Because there is an amount perhaps in last year's 3Q and 4Q that you didn't recover that will aid you in the second half?

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Brian B. Bird, NorthWestern Corporation - CFO [48]

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I don't anticipate that would be a material benefit that you could show on a year-over-year basis.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [49]

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Okay. And when you said the NOLs were $257 million. I guess what I'm really trying to get a sense of is, if I go forward from say 2020 to 2021, in terms of the cash flow effect in terms of the reduction of cash flow?

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

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Yes. I can't give you that idea in terms of what impact would be in 2021 at this point in time.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [51]

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The slight implies that it basically goes to 0 and then going forward, it's 0.

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Brian B. Bird, NorthWestern Corporation - CFO [52]

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Yes. We still have some PTCs and AMT benefits, but I'm not comfortable giving you exact dollar amount at this point in time.

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

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Okay. And I guess in terms of the -- in excess of $200 million over the next 5 years, that basically -- that fully just cover the pending South Dakota, RFP, and the soon-to-be initiated RFP in Montana. It's just those 2 items?

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

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It would be our -- the first 2 RFPs that you'd see, one from South Dakota and one from Montana.

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

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And in terms of the capital, is it reasonable to think that the proportionality of South Dakota relative to Montana is similar to what we see in the capital program, which is generally 10% to 15%. So if we're thinking of in excess of $200 million, that in there you're at 10% to 15% of that realistically would be considered South Dakota?

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

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I think -- I would say we've given pretty much -- pretty good guidance already on the $200 million, as is. I would just tell you, obviously, on going-forward basis. The opportunity set Montana significantly higher than in South Dakota.

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [57]

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And that's for 2 reasons. Obviously, the Montana jurisdiction is larger, but secondly, the whole round is just that much deeper.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [58]

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No. I understand, especially that this is only phase 1. I get that. What I'm really trying to make sure kind of baseline is the $200 million related to what exactly? Is -- and just -- and I guess in a way to kind of going back to clarification, I think Chris was requesting in relation to the total shortages versus what this first period would attempt to address.

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

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Vedula, given you have -- there is much guidance I can on that $200 million.

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Operator [60]

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(Operator Instructions) And 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 [61]

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Just 1 question for me. The Montana supply resource plan, it seems like it keeps kind of slipping when you're actually filing it. Can you kind of outline what's going on? Why it has gotten kind of push back? And if there's anything we should read into that, whether good or bad?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [62]

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Oh, gosh. No. What I would say is we prepared a draft plan. We posted that for public comment. We received very robust comment. Our supply folks are analyzing those and the plan is nearly ready to hit the streets.

So I don't -- I'm not at all concerned about delay. What I would say, going back to the 2015 plan and you know there was a lot of noise at the end of that plan and ultimately we weren't able to implement the RFP that we went out with after that plan. And that's a shame because subsequent events, the real capacity needs that would have been exposed both summer and winter, just demonstrated how critical it is to move ahead. And it's a shame from our customer's perspective that we weren't able to move ahead on the RFP following up on the 2015 plan. Right, I really do feel very, very good about where we are with this year's plan.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [63]

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Okay. And so when you do have a final plan, Bob, do you feel there'll be kind of a consensus throughout much of the state that we've -- what the needs are? And how to move forward? Like by offering those party comments and where can we draw?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [64]

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What we've done is a plan that really is focused on identifying the needs. And we have various scenarios that are modeled. I'll refer to those before. But ultimately, any project of any kind that is able to help us meet our customers' needs will have the opportunity to bid in to be evaluated by a third party and certainly there will be -- there are strong views about what resources are best able to meet the need. But at this point, I certainly hope that experience even over the last 2 years should lead thoughtful people to agree on what the need is. I'll highlight just a couple of things there. Within the Northwest region, there are now multiple studies, including by very reputable, really environmentally oriented firms, such as E3 identifying the current and growing capacity needs. Randy Hardy, former BPA Administrator, wrote another paper just describing how the region has been leading on the investments made, the resources built going back in the 1950s and that actually includes supply resources, but also truly transmission resources.

The Montana Commission has spent time now looking at some of those reports. There's a great joint presentation by E3 and our transmission department and our supply department talking about the capacity needs. Just last month, Chairman Johnson of the Commission wrote an op-ed that was carried around the Montana newspapers that said, Montana needs baseload power. And that's a real change in tone. And I think a recognition by the Commission, certainly recognition by other policymakers around the state that we have a need. Again, that we've plenty to discuss and debate over how to estimate that need. But I can't imagine anyone looking at the situation not recognizing we have a reliability need from a reliability risk and a price risk if we don't move ahead to address the capacity need.

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Jonathan Garrett Reeder, Wells Fargo Securities, LLC, Research Division - Senior Analyst [65]

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And then Bob anymore kind of activity around resurrecting kind of Colstrip longer term with I guess that need for baseload power or is that still kind of let's get the settlement approved in all that and then maybe go back and revisit?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [66]

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Colstrip is a valuable resource within a diverse portfolio. The concept that was considered in the legislature actually had a lot of support was a good concept would have produced an immediate net savings for our customers would've taken down an increment and then far, far, far from the majority, but an increment of the exposure we had would have addressed the transmission risks that we faced as well. And really would have used that resource as a bridge to resources that are emerging now but that are currently in many cases, not very attractive from a cost performance. So it's a resource in a course that was compelling when the legislature was in the session and it's still compelling now. The deep focus right now really is on to the earlier question getting the plan filed and moving ahead.

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Operator [67]

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We'll take a follow-up question from Vedula Murti.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [68]

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When you get the plan -- when you put out the proposal in late '19 for Montana, how long will be our turnaround before the actual conclusion is reached?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [69]

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Let's say the plan is released and filed in the next month or so. We want to go out for an RFP later this year and move ahead on that. And there's no reason to believe that that RFP would have to be interrupted the way the RFP coming out of the following plan was. And then we moved from there to selection and hope to see a good outcome in terms of a resource choice.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [70]

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So we'd know the outcome of that, say, mid-2020?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [71]

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See, that seems reasonable because we don't know what happens between now and then, but that's I think a reasonable guess.

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

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Yes. I think the main thing there is the timing associated with when that will make an outcome there. Clear thing is we have to have that capacity in by the end of 2022. So it's important for us to get going.

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [73]

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We need resources in order to participate in the Imbalance Market.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [74]

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Okay. And if I recall there were times when various policymakers, regulators, et cetera, have raised questions about the desirability of the utility to own assets as opposed to simply contracting from third parties to meet these needs. I'm wondering how that may -- how that type of thought may have evolved? And are -- and whether you're able to compete equally on an equal comparable footing with any third party as part of this process such that there is no -- that type of historical buys for like a better time is not relevant?

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Robert C. Rowe, NorthWestern Corporation - President, CEO & Director [75]

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Yes. There are rules for contracted resources and for owned resources and they are complementary. If you take a look at how deep we are in the market at periods of peak and what is happening in that market, it's pretty tough to make the argument that we ought to be more exposed to the market than we already are.

And I think honestly, people who lean too heavy -- too heavily on a market solution to meeting our peak needs are not very in touch with recent history in Montana. And as you know that the defining act in that history was deregulation and divestiture of supply, leaving us exposed to the market. The responsibility we have to our customers is to plan long-term lease cost, lease risk and the lease cost actually really is what we organize around.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [76]

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And in this RFP, whatever the physical capacity is, that ends up being determined. To your point, in terms of relying on the market, if its new physical resources that actually are added to system, is there an advantage or an imperative that, that you own it as opposed to a third party building it and basically contract a new contractor firm.

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

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Third parties will be on an equal footing with any proposal we make. And the third party administrator to the process will ensure that.

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Operator [78]

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It appears there are no further questions at this time.

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

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Great. Well, thank you very much for the very good discussion and your interest and support. Going to be seeing many of you over the coming months.

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Operator [80]

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(technical difficulty)

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