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NorthWestern Corp (NWE) Q1 2019 Earnings Call Transcript

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NorthWestern Corp  (NYSE: NWE)
Q1 2019 Earnings Call
April 24, 2019, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the NorthWestern Corporation's First Quarter 2019 Financial Results Conference Call and Webcast. Today's event is being recorded. At this time, I would like to turn the conference over to NorthWestern's Investor Relations officer, Travis Meyer. Please go ahead, sir.

Travis Meyer -- Investor Relations

Thank you, Chantelle. Good afternoon and thank you for joining NorthWestern Corporation's financial results conference call and webcast for the quarter ending March 31, 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 with us today 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 today.

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'll remind you of our safe harbor language. During the course of this presentation, there will be forward-looking statements within the meaning of safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often address our expected future business and financial performance and will contain the 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 10K and 10Q along with other public filings with the SEC.

Following our presentations, 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 one year beginning at 6 p.m. Eastern Time and can be found on our website, again northwesternenergy.com under the Our Company Investor Relations Presentations and Webcast link.

I'll now hand the presentation over to our CEO, Bob Rowe.

Robert C. Rowe -- President and Chief Executive Officer

Good afternoon and thank you all for joining us. As you know, we just finished our quarterly Board meeting and annual shareholders meeting within our operations center in Huron this week. Had a great community event, good breakfast and discussion with our Huron-based employees this morning. A neat thing about Huron, it has, you may have seen this in the papers last week. It has a higher percentage of immigrants than any city in the United States. And over the last few years, the community has really embraced primarily ethnic and religious refugees from Burma and they've just added a lot to the community.

We were joined by this year's leadership, NorthWestern class and these are folks from all over the country, all over the Company. Some with decades of experience, some with only a year or so of experience and they've been traveling around visiting our South Dakota locations this week and tomorrow night, if you happen to be in the Sioux Falls area, you're welcome to join us all for dinner and meet the class, Brian and Janet Burtoft (ph), and that's going to be a lot of fun as well.

Turning to highlights. Net income for the first quarter increased by $14.3 million, 24.4% as compared to the same period last year. This was primarily due to higher gross margin which was the result of colder weather and customer growth and then also a reduction in revenue in 2018 due to impact of the Tax Cuts and Jobs Act. And this was all partially offset by higher operating expenses. Diluted EPS increased $0.26 or 22% as compared to the same period last year. And then after adjusting for favorable weather in both periods, non-GAAP adjusted EPS increased by $0.12 or 10.8% as compared to the same period in '18.

On April 15, we issued a request for proposals for 60 megawatts of flexible capacity resources to begin serving South Dakota customers by the end of 2021, responses are due in July 2019 with the evaluation of the proposals in the second half of 2019. We'll come back and talk a bit more about that and other supply matters. And then the Board of Directors declared a quarterly dividend of 0.575 per share payable June 28 to shareholders of record as of June 14. And with that, off to Brian

Brian B. Bird -- Chief Financial Officer

Thanks, Bob. The summary financial results for the first quarter, we had a very good first quarter of 2019, gross margin was up 9.4%, operating income up nearly 15% and as Bob pointed out, net income and diluted earnings per share were both up over 20%. So very, very good start to the year.

Moving right to gross margin. For the first quarter, gross margin was $268.5 million or an increase of $23.1 million again 9.4% increase of and by the way that increase was both across the electric and gas business. The gas business impacted a bit more by weather than the electric business. The three biggest drivers that impacted the change in gross margin that actually impacts net income was obviously an increase in natural direct gas retail volumes and an increase in electric retail volumes, a total of $13.4 million between those two and that was primarily driven by colder weather but we did see increase in customers as well during the quarter.

The last item of significance during the quarter was in 2018, you may recall because as a result of Tax Cuts and Jobs Act, we did have some margin revenue reserved associated with a give back to customers that we did in fact provide at the end of the year. The -- we did not have any of those deferrals in 2019, thus the benefit in '19 versus '18 that was of $7.3 million. The total of those three items themselves add up to approximately $20.2 million below change in gross margin offset elsewhere within the P&L, we did have $2.9 million. And we had a total increase of $23.1 million increase in gross margin for the quarter.

Moving on to weather. We were colder in all jurisdictions both versus the prior year and versus our historic averages. As you could see in the map at the bottom of the page both February and March much colder than they had been versus normal. And as a result, (inaudible) we had a $14 million improvement in pre-tax gross margin as result of weather and $9.2 million better than the first quarter of 2018.

Moving on to operating expenses. Operating expenses were $171.5 million or $10.6 million, 6.6% better than the prior year period. Operating general administrative expenses about 9.2% increase and property taxes and depreciation up just under 5%. Back to the OG&A at the top of the page, if you backed out those items that were offset elsewhere within the P&L, the increase is approximately just under 5% for that item. And matter of fact the $3.7 million change in OG&A that actually impacts net income. The first two are the primary importance to talk about here. Hazard trees, we are more focused on spending on trees outside of our right-of-way in 2019 and decided to allocate more dollars toward that during the year, it was $0.9 million in the first quarter.

We've also increased our cash funding approximately $4 million in 2019 primarily due to asset returns that we've experienced, the impact in the first quarter of that was $0.9 million as well. So those are the two biggest drivers in the operating expense items that impact net income. We did have $3.1 million of items that are offset elsewhere in P&L for a total of $6.8 million increase in OG&A. I did mention the increases in property taxes and depreciation of $2 million and $1.8 million respectively. Both of those increases are primarily due to plant additions.

Operating income, top (ph), Page 8, $97 million, $12.5 million or 14.8% better than the prior year. Below that interest expense is up slightly due to higher borrowings, other income has improved $2.2 million on a year-over-year basis primarily driven by those items I mentioned else -- earlier that are offset elsewhere in the P&L, but also due to higher capitalization of AFUDC in the quarter. That provided for an income before taxes of $74.4 million or $14 million improvement an increase of 23.2% and then below that is income taxes are actually down slightly.

And I'll speak more to that on the next page. The income tax reconciliation even though we did have an increase in the pre-tax income that actually increased our tax associated with the federal statutory rate. We did have a higher level of flow through adjustments on a year-over-year basis which ultimately netted $0.3 million decrease in income tax expense.

Moving to the balance sheet, not much to report there, very little change since year end 2018, but you can see, we continue to trend closer to the bottom end of our 50% to 55% targeted range on debt to cap. We're now at 50.8% at the end of the first quarter. Moving on to cash flow. We did have an impact on cash flow for the first three months of '19 versus '18. Cash from operating activities decreased by $61.6 million primarily due to an increase in market purchases of supply resulting in under collection of supply costs from customers. We also provided for TCJA those credits even though the book expense or the -- I shouldn't say book expense, the hit from an income perspective hit in 2018, we really didn't feel the impact of those from a cash perspective until the first quarter of 2019. And also we had receipt of insurance proceeds during the first quarter of 2018. Those are the biggest impact on the cash flow statement.

Moving forward to adjusted non-GAAP earnings, the bottom of that page, you can see the far left from a GAAP perspective $1.44 for the quarter when you back out $0.21 of favorable weather, we get to $1.23. That's compared to on a prior year basis $1.11 which was adjusted by $0.07 of favorable weather. That $1.23 is $0.12 higher than the prior year period on a -- an adjusted non-GAAP basis or a 10.8% increase.

When you do that throughout the P&L, you can still see a nice improvement in gross margin even after adjusted for weather approximately a 6% improvement there, that was higher, that percentage increase was higher than increase in operating expenses on an adjusted basis resulting in a 7.1% increase in operating income an 8.6% improvement in pre-tax income. And lastly, $7.4 million or 13.5% improvement in net income.

We were slightly lower on a diluted EPS percentage increase because we did have share dilution on a year-over-year basis. With that, I'll hand it back over to Bob.

Robert C. Rowe -- President and Chief Executive Officer

Great. Thank you, Brian. A summary of upcoming (ph) events appears on Page 13. As you know, we filed a Montana general electric rate review in September that will be go into hearing next month. We expect to file a parallel FERC rate case for Montana transmission assets in the coming days as well, continue to focus on our transmission and distribution infrastructure with our comprehensive capital program addressing safety, capacity and reliability, obviously we're well under way with that and on the natural gas side specifically, significant investment driven by safety compliance activities. And then grid modernization including the advanced distribution management system. We're deploying currently and the AMI system that we're under way deploying starting in South Dakota moving both gas and electric, moving South through South Dakota into Nebraska and then taking a look at Montana.

We continue to make progress preparing to enter the Western Energy Imbalance Market and of course we're ever vigilant concerning control in all costs and well under way with planning and implementation particularly at the South Dakota Resource Plan. We'll talk a bit more about that. Turning to the Montana electric rate review. This is our first general Montana electric case since 2009 and that's a reflection of our ability to provide really pretty extraordinary price stability to our customers over that period and while we've done a good job I think managing our costs, increased property taxes along with significant investment in the T&D system really did compel us to finally come back in. And obviously, it's a great thing for our customers that we were able to stay out for as long as we were while continuing to invest and maintain very high levels of service.

So in September of '18, we filed based on our 2017 test year and $2.34 million (ph) of rate base. At the time, we requested $34.9 million annual increase in rates for a residential customer that would be about a 7.4% increase.

Then on April 5th, this year, we filed a rebuttal testimony updating and lowering our requests to $30.7 million and this responded to intervenor testimony but also included various known and measurable adjustments. We requested a 10.65% ROE, 4.26% cost of debt and a capital structure with 49.4% equity and therefore 7.42% return on rate base. In March, the Commission issued an order, an interim order approving approximately $10.5 million on an interim and refundable basis that was effective on April 1st.

February 12th, intervenor testimony came in and the Montana Consumer Counsel took an opening position recommending a $7.3 million rate decrease and on February 28, the Commission voted to request additional testimony on five issues and those are spelled out in the deck. That did include probably most notably more discussion of hazard tree and wild fire liability mitigation. That's an issue, we're obviously focused on and have been focused on for quite some time.

May 3rd, is the final day for both NorthWestern and intervenors to respond to discovery. May 13th, the hearing starts, in addition to the standard rate review issues, we viewed little (ph) proposal to capitalize DSM costs, establish a new baseline for the electric supply tracker, the PCCAM include the Two Dot wind project in rate base and then approve a new class for our -- for future net metering customers while current net metering customers would be grandfathered. Lots of interest in the Montana legislature specifically sessions were wrapped up in South Dakota and Nebraska and were quiet and constructive. In Montana, the last legislative day on a 90 day calendar is Monday the 29. There's expectation they will adjourn sine die before then. We were up following quite a number of bills and we're successful in supporting the defeat of bills that we think would have been quite harmful to our customers and to us and also had some success on a couple of issues that were important to us.

In summary, there was as you know legislation that would have allowed us to acquire up 250 megawatts of generation from Colstrip -- Colstrip Unit 4 for $1 and would have also facilitated acquisition of a greater share of the Colstrip transmission system that we operate and the primary vehicle there was Senate Bill 331 that is now listed as probably dead.

Also we were interested in legislation that would remove the so-called deadband plus or minus $4.1 million deadband sharing provision from the Commissions' electric supply tracker order and that is Senate Bill 244 that has been enrolled and then will be submitted to the Governor. There was also legislation that would -- several (ph) pieces originally that would have prohibited the Commission from applying a maximum contract length of 15 years to future owned or contracted supply resources as had been required in the Commission's November 2017 Qualifying Facilities order. This was the so-called symmetry rule and one of those pieces of legislation HB22 may be moving into or is moving into conference. We don't know the final outcome even on the legislative side for the next couple of days although things are very clearly wrapping up. So it's premature to say the ultimate end of all of this. But again the -- on many subjects, we consider the Montana session to have been a success.

Certainly, it is -- very disappointing for our customers in terms of where the bill would have addressed providing the Colstrip benefit appears to be ending up. Turning to our supply plans. The South Dakota plan is moving ahead in really great fashion. It's published in the fall of '18, focuses on modernizing our fleet, improving reliability and flexibility, maintaining compliance in the Southwest Power Pool and lower operating costs. We've identified about 90 megawatts of existing generation that really needs to be retired or replaced over about 10 years.

And on April 15th, just a few days ago, we issued an RFP for 60 megawatts of flexible capacity resources to begin serving our South Dakota customers by the end of 2021. Responses are due in July then we'll evaluate proposals over the second half of the year. So there is an awful lot of interest in that process to-date and we're very pleased with that.

Concerning the Montana plant, a draft plan was completed in March. It's expected to be finalized by the end of June and we're sponsoring a 60 day online comment period. You can go to our web page, look at the plan and track comments. And the deadline for filing public comments is May 5th. And the plan focuses on the goal of developing resources that will address our fairly dramatically changing energy landscape and meeting our customers' needs in a reliable and affordable manner.

And right now, we're about 630 megawatt short of our current peak needs. And that means that as was the case in February-March of this year and for that better August, we were in the market at the absolute worst possible time and with coal retirements and increases in intermittent resources in the region that market is changing really quite dramatically. And as a result, we forecast that our portfolio is going to be about 725 megawatt short by 2025. And that's even assuming contributions from energy efficiency and distributed generation and a relatively modest increase in customer demand.

Planned regional retirements of coal plants as I mentioned earlier, 3500 megawatts and the loss of load probability becomes significant according to the council by -- the regional power planning council by 2021. We -- our draft plan contemplates soliciting all source proposal, supply side, demand side of all flavors later this year for peaking capacity available by 2022 and then we would essentially wash, rinse and repeat several times and the reason for the multiple rounds is to feather in resources, take advantage of technology developments, changing cost structures. Because that occurs. But the need is significant. Very important to note that the plan would be to use competitive solicitations administered by independent evaluators and therefore, we have not included capital associated with the identified needs in our forecasts and these needs could affect our capital spending potentially in excess of $200 million over the next five years.

And then with that turning to the capital forecast. We're still anticipating $1.6 billion of total capital over the next five years. The increased investment that you see in the first three years is associated primarily with the important and immediate focus on AMI. Initially as I mentioned in South Dakota. And we continue to anticipate funding this level of investment with cash flows aided by NOLs and then long term debt issuances, but investments that are not in the above projections or on the other hand, further negative regulatory actions could require additional funding. And then as we highlight every quarter, this capital forecast does not include investments associated with identifying needs under either the South Dakota or the Montana supply plans.

And with that, I believe we can open it up for any questions.

Questions and Answers:

Operator

Thank you very much. Ladies and gentlemen, at this time we would like to open the floor for questions.

(Operator Instructions)

Our first question will come from Julien Smith, Bank of America.

Nick Campanella -- Bank of America -- Analyst

Hey it's Nick Campanella on for Julian, today. How are you?

Robert C. Rowe -- President and Chief Executive Officer

Good afternoon, Nick.

Nick Campanella -- Bank of America -- Analyst

Hey, I just wanted to be clear on Colstrip just given the legislation died. Are there other path forward that you see in which you could still acquire capacity or transmission there to perhaps fill your longer term resource needs or otherwise ?

Robert C. Rowe -- President and Chief Executive Officer

I think we're going to have to put down the pens and focus on the rate review for the coming months and just assess the situation. This was an extraordinary missed opportunity and I think a real shame for Montana to acquire a resource with great immediate and long term value for our customers, a great bridge resource. And to clarify ownership of that and future directions for the transmission system that's just as critical infrastructure to serve our customers. The problem is that the risk and reward were incredibly misaligned. We were eager to pursue the benefit, the reward on behalf of our customers provided we could address the risk and that was really a pretty modest goal in the legislation but sadly, we just couldn't get there. So the answer is the value is still there, it's a real shame for the state of Montana that we couldn't capture that value, preserve it for our customers. We're going to be focused on the rate case, finishing up the supply plan and see what happens from there.

Nick Campanella -- Bank of America -- Analyst

Got it. And then I guess just regarding the rate case, I know that you mentioned there was additional testimony required on five issues. And you mentioned the disposition of excess ADIT. Is that the same as the repairs tax issue in the rate case. And then can you just kind of talk about what that is and your ability to address it in this rate case?

Robert C. Rowe -- President and Chief Executive Officer

Yes, Brian.

Brian B. Bird -- Chief Financial Officer

Yeah I think the issue there is the amortization associated with excess deferred taxes and how that's going to be treated on a going forward basis and even for the period up on to the time on going forward basis and how that would be captured. There's quite a few questions about pension included in -- in ADIT and other things that are part of the rate case, it's pretty complicated stuff. Nick, we'd like to think that we can focus on what the major issues are in the rate case and spend less time talking about taxes to be quite honest.

Nick Campanella -- Bank of America -- Analyst

You don't see this inhibiting your ability to potentially work toward a settlement or anything?

Brian B. Bird -- Chief Financial Officer

I think, we'll continue to try efforts there. I can't tell you that anything could come in the way of settlement or not. That's very early. We just got past the Board meeting. There's not a lot of discussions going on settlement at this point in time.

Nick Campanella -- Bank of America -- Analyst

Got it. And then just my last question. I think, you had some pretty successful legislation on the AMI side in Montana and I just was just wondering, could you talk about what's reflected in your current CapEx plan? Does the timing shifts there and when would you potentially try to bring that forward to the PSC?

Brian B. Bird -- Chief Financial Officer

We are continuing to evaluate the timing of the AMI program, we do have it laid out here. We have to complete our South Dakota and Nebraska program that certainly rolls into 2020. We will lay out our Montana plan and before we do, we will certainly sit down with the Montana Commission.

Robert C. Rowe -- President and Chief Executive Officer

The big activity on the distribution operations side actually across the Company is deploying ADMS this year and then in Montana specifically at enormous conversion to LED street lights. That's for our Montana ops folks are really focused right now.

Brian B. Bird -- Chief Financial Officer

And to be clear, Nick, on that, we do have dollars in our capital plan associated with Montana AMI. The issue there is that we'd be able to capture during this full -- five year period or could that be spread out a bit more. But we're not the start of the program certainly not being impacted at all.

Nick Campanella -- Bank of America -- Analyst

Got it. Thanks again, guys.

Operator

Thank you very much. Our next question will come from Michael Weinstein at Credit Suisse.

Michael Weinstein -- Credit Suisse AG -- Analyst

Hi guys. How are you doing?

Robert C. Rowe -- President and Chief Executive Officer

Hey Michael.

Michael Weinstein -- Credit Suisse AG -- Analyst

So currently there if the deadband, as you go into the rate case, the deadband is still in place right for the PCCAM?

Brian B. Bird -- Chief Financial Officer

Absolutely. It's in place and our hope is legislation ultimately gets signed by the Governor that would remove it before it would come in effect again on July 1 of 2019. But we've already blown through the deadband, the tracker year starting July 1 of 2018. So the impact in the first quarter associated with the PCCAM was just the 90-10 sharing that occurred and so we took the 10% hit of that amount over our base period if you will for the first quarter that was approximately $1.6 million.

Robert C. Rowe -- President and Chief Executive Officer

And the bill is effective upon signature. So we certainly are hopeful there.

Michael Weinstein -- Credit Suisse AG -- Analyst

Got you. And I think Nick already asked this question but, yeah I was just wondering about the -- I guess in the rate case. If you guys are -- there certain issues that would be easier to settle than others as you maybe contemplate settlement discussions as you get closer to the hearing dates?

Brian B. Bird -- Chief Financial Officer

I do think, I would just say this, Michael. I think back to the tax question, is a very complicated items and I think, we feel very good about our position on lot of those items and so I don't think we'll head down the path on those items much. Obviously things like ROE and others are easier to talk about than some of these sophisticated matters but it's early and not a lot of discussion going on at this point in time, so it's too early to tell.

Robert C. Rowe -- President and Chief Executive Officer

You've got to some extent overlapping and to some extent different parties interested in different issues but obviously, the core we're focused by consumer counsel, large customer group is going to be cost of capital, capital structure, revenue requirements and then cost allocation.

Michael Weinstein -- Credit Suisse AG -- Analyst

Right. And also Bob, you said that, you think that basically it's Montana's missed opportunity on SB 331. I was reading though that there might be some other energy legislation that might pick up the ball? I mean, is it really a dead issue? Or is there no chance at all in this legislative session?

Robert C. Rowe -- President and Chief Executive Officer

We're down to the final hours of the session. I suppose theoretically, it's not over until sine die, but there are no more than at most a couple of days if that.

Michael Weinstein -- Credit Suisse AG -- Analyst

Got you. Okay, thank you very much.

Brian B. Bird -- Chief Financial Officer

Thanks, Michael.

Operator

Thank you. Our next question will come from Jonathan Reeder, Wells Fargo.

Jonathan Garrett Reeder -- Wells Fargo Securities -- Analyst

Hey. Good afternoon, Rob and Brian. How're you all?

Brian B. Bird -- Chief Financial Officer

Good, Jonathan, thank you.

Jonathan Garrett Reeder -- Wells Fargo Securities -- Analyst

Hey, so is there any reason the Governor wouldn't sign SB 244? Are you feel good about that?

Robert C. Rowe -- President and Chief Executive Officer

We think it's pretty straightforward, logical and fair legislation, got good bipartisan support. So we're certainly hopeful.

Jonathan Garrett Reeder -- Wells Fargo Securities -- Analyst

Okay. And then what are the differences, Bob, between the Senate and House versions of HB 22 that need to get ironed out and in conference?

Robert C. Rowe -- President and Chief Executive Officer

I'm sorry. I couldn't quite hear that.

Jonathan Garrett Reeder -- Wells Fargo Securities -- Analyst

What are the differences between the Senate and House versions of HB 22 that need to get ironed out in the conference committee?

Robert C. Rowe -- President and Chief Executive Officer

It -- primarily it has to do with some of the QF language, and again, I apologize, I can't tell you the status of that as of this afternoon. It's lot harder. I'm not on the ground there obviously and so lot harder to follow things once they get into conference. So we hope, we'll have some visibility pretty quickly on that.

Jonathan Garrett Reeder -- Wells Fargo Securities -- Analyst

Right. Do you think there's like a big bridge to gap or it's just kind of some semantics and it'll get figured out?

Robert C. Rowe -- President and Chief Executive Officer

From where we sit, it doesn't seem like as big a gap.

Jonathan Garrett Reeder -- Wells Fargo Securities -- Analyst

Okay, got you. And then Brian on the rate case, can you remind us how the authorized equity ratios are typically determined in Montana? Is the formulaic based on actual structure as of a given date or does the MPSC have discretion or latitude to set what they believe is appropriate?

Brian B. Bird -- Chief Financial Officer

I'll answer your first question, first, they have discretion, but what has been standard and has been followed for many rate cases now is the fact that we use kind of a rate base, subtract, allocated debt to that jurisdiction to calculate equity and then ultimately doing the capital structure, since we do not have the whole co structure and we're dealing with long term debt only in that jurisdiction that's how we ultimately calculate the capital structuring, it's been consistently used for I think about 10 years now.

Jonathan Garrett Reeder -- Wells Fargo Securities -- Analyst

Okay and that's what your filing is based on?

Brian B. Bird -- Chief Financial Officer

That's correct.

Jonathan Garrett Reeder -- Wells Fargo Securities -- Analyst

Okay. And then I guess in terms of like a potential settlement, at this point, I think you said that discussions haven't yet really begun. So remind us on the timing, it's typically post hearings, I guess.

Brian B. Bird -- Chief Financial Officer

No, I think, what typically happens is shortly after rebuttal is filed and that there's usually a discussion shortly after that. I think, should -- people should keep in mind, I think MDU's hearing is before ours. So I don't know what's going on there. They may be spending time with MDU at this point in time. They have a -- a bit of work to do with -- hearing very shortly for MDUs and ours starting on May 13th. So and we've been tied up with Board meetings, so there has been a lot of discussion about settlement at this point in time.

Jonathan Garrett Reeder -- Wells Fargo Securities -- Analyst

Okay. Well good luck on the upcoming hearings and settlement discussions, looking forward to an update. Thanks.

Brian B. Bird -- Chief Financial Officer

Thanks, Jonathan.

Operator

Thank you.(Operator Instructions) Our next question will come from Vedula Murti, Avon Capital.

Vedula Murti -- Avon Capital -- Analyst

Good afternoon.

Brian B. Bird -- Chief Financial Officer

Hi Vedula.

Vedula Murti -- Avon Capital -- Analyst

I look to couple of things. One, I guess in terms of the resource plan and the opportunity for your own capital expenditures to start filling in the deficit. Can you remind me again exactly when you would be able to know the outcome of that and be able to present the Commission the -- what the outcome was that you'd like to pursue?

Robert C. Rowe -- President and Chief Executive Officer

On the South Dakota side that's in progress. The RFP is out, we'll be evaluating that in the second half of the year. And again, we have to demonstrate that our proposals are the best but that's being addressed really pretty efficiently. On the Montana side, we will conclude the comment period, file the plan with the Commission shortly after that get input from the Commission and then presumably at that point, move out with a third party administered RFP.

My sincere concern is that, we're in a very very big hole in Montana. The region is moving in to a hole and Montana's hole is that much deeper still with the legacy of supply deregulation and divestiture in 1997. So I'm hopeful that we and the Commission can move this forward pretty quickly.

Vedula Murti -- Avon Capital -- Analyst

So when you have your plan and split to Commission, it's possible then that the plan that then is put out for ultimate proposal for third parties and for yourself could be -- to be significantly different than what you propose?

Robert C. Rowe -- President and Chief Executive Officer

It should not be, no. The typical process involves taking public comment. Probably doing a technical workshop. The Commission then issuing comments as well. The Commission has retained a consultant to help look at the plan. My understanding is that the consultant is focusing primarily on the degree to which the plan was responsive to various questions and issues raised under the 2015 plan and we obviously believe that we've done a very good job responding to that.

The -- I think that Commission understands the urgency. Just a couple of weeks ago and I would actually encourage you to go take a look at this. They received a presentation from E3 Consulting and E3 had been retained to look at the regional peaking concern and I mentioned increased loss of load probability regionally by 2022. It's a serious situation and much more so for NorthWestern's Montana customers than for anyone else. So I'm hopeful that thoughtful people have spent some time with that subject and understand how serious it is.

Vedula Murti -- Avon Capital -- Analyst

So when would you feel like they'll be able to announce how much capacity actually will or capital will be awarded as part of this RFP? And what -- and the allocation between yourselves and potential third parties ?

Robert C. Rowe -- President and Chief Executive Officer

Way too early to speak to that. We really do have to get the plan filed and get some -- some input from the Commission before we can go to that.

Vedula Murti -- Avon Capital -- Analyst

Now thinking more simply about timing, when you would be able to communicate how -- what actually end up being approved after the -- after it's been submitted to various third parties and yourself.

Robert C. Rowe -- President and Chief Executive Officer

Well we hope to be able to solicit proposals later this year.

Brian B. Bird -- Chief Financial Officer

Vedula, with that, I would say, I think the earliest would be late 2019, we'd have a response to that more likely early 2020.

Vedula Murti -- Avon Capital -- Analyst

Okay. That was -- I appreciate that. Thank you. You have -- you probably doing a very nice job here for quite a while in terms of being able to manage staying out of the regulatory arena. Given that it's a 2017 historical test year already even with the -- when you solve this case in May or June or whenever, you're already going to be behind in terms of simply rate base and everything like that. So I don't know if you can kind of speak to it because it appears to me just mathematically that based on your capital expenditures less DD&A and everything like that.

Every year that you're not updating things here. Your rate base is growing by about $120 million or something like that a year give or take. That needs to be offset either through customer growth or cost adjustments and everything like that if it's not being necessarily trued up in regulatory filings. Can you just kind of speak to from a planning purpose given the historical lags? What type of regulatory lag you tend to place in your forecasts relative to the authorized?

Robert C. Rowe -- President and Chief Executive Officer

Brian is waving his hands, saying give me the ball, give me the ball.

Brian B. Bird -- Chief Financial Officer

I think we've tried to operate by jurisdiction within 50 basis points of our authorized. And once we get outside of that, it's time to take a look at rate cases. I think if you look at our 2018 Montana annual report now from an electric standpoint, I think that -- that will be coming out here shortly, you will see that we would be under earning pretty significantly in Montana thus it was important to come in for a rate case. I think to answer your question specifically, we really have to see how we do in this particular upcoming rate case.

Obviously, if we get a good outcome that provides us some cushion to continue to operate without coming in quicker, if we do not. Unfortunately, we'd have to be a bit more frequent rate filer and so, I think that's something that we had to take consideration. So that's a very good outcome, is important to all parties. We will continue to manage our business to try to minimize the impact on customers' bills regardless of the timing of when we come in for rate case and I guess, I'll leave it at that.

Robert C. Rowe -- President and Chief Executive Officer

All I would add is obviously we look every year whether we need to go in. We work to avoid rate cases because we like to provide our customers stable rates. We've been successful in doing that. At the same time that we've maintained good levels of investment and high levels of service. So from a regulator's perspective, I think most regulators would say, that's a win. When we have to file, it's time consuming and truly does draw attention and key resources away from doing the work we all want to do to serve our customers, so we don't file lightly by any means.

The other thing and it's true in many rate reviews but certainly in this one is you've got a series of pretty significant policy issues embedded primarily in rate design and those have to be addressed to hopefully at least take steps to better position us to serve our customers the way they want to be served in the future.

Vedula Murti -- Avon Capital -- Analyst

Okay. And I have one last thing. Maybe a little nit picky on the -- one on the 1Q '19 gross margin charts, you mentioned the benefit of $7.3 million associated with the Tax Reform Act. Now when we go forward, say 1Q 2020, obviously that will not be there but there will be some revenue increase associated with this rate case and basically any other operating pluses and minuses and sales and things of that nature. Is that the right way to think about it? Just when we're just kind of thinking about basically comparisons going forward that the outcome of this rate case and the gives and takes and whatever will be the items that will help offset that one item that clearly will not be there next year?

Brian B. Bird -- Chief Financial Officer

I think you caption that appropriately. You have to consider once a rate case is finalized, you have a new revenue requirement and you're moving forward the goods and the bad associated with the moving parts in that particular rate case.

Vedula Murti -- Avon Capital -- Analyst

Thank you very much.

Brian B. Bird -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question will come from Paul Patterson, Glenrock Associates.

Paul Patterson -- Glenrock Associates -- Analyst

Hey good afternoon.

Robert C. Rowe -- President and Chief Executive Officer

Hey Paul.

Paul Patterson -- Glenrock Associates -- Analyst

So Vedula, he actually covered all my questions but one final sort of thought I was thinking about here was and maybe I mis-recollected it. But I thought that the Montana commissioners were generally in favor of the Colstrip legislation and if they were, is there any regulatory approach that could be used to address the Colstrip, the 331 bill. Do you follow what I'm saying, or the absence of the 331 bill?

Robert C. Rowe -- President and Chief Executive Officer

Yes. And in -- sometimes in some places, I think the answer to that is yes. The Commission was divided and they were divided for legitimate reasons. I think that strong majorities saw real benefit in being able to acquire that asset for our customers. Their concern appear to be focused on language addressing the Commission's role. We have -- and we talked about the fact that the -- there are great benefits to our customers and great benefits to the system from doing this, but risks associated with going out to pursue that benefits and our view is that the risks really fell on shareholders and unfortunately, we have experience of the Commission -- I'm not arguing with specific decisions, but the Commission pretty abruptly changing its policy late in the course of contested cases, eliminating the lost revenue, adjustment mechanism that had been a cornerstone of policy for quite some time. Changing its approach to cost recovery in the supply tracker, taking a different course in the -- even in the most recent iteration of the tracker pursuant to statute has been -- what had been represented that it was going to do and to some extent that's a function of who happens to sit in those chairs.

So that changes over time as well. We've also though seen parties come in front of the Commission `really trying to reargue -- reopen subjects that had been we thought pretty definitively settled in previous Commission orders. Some of those examples are big. Some of those are smaller. So all of that comes together to create some pretty significant risk associated basically with this trying to do something good for customers. So that's the kind of risk you -- we just have to figure out one way or the other how to address and we're sure open to suggestions on that. But in Montana, unfortunately those are real risks.

Paul Patterson -- Glenrock Associates -- Analyst

Thanks so much. Have a great one.

Brian B. Bird -- Chief Financial Officer

Thanks, Paul.

Operator

Thank you very much. (Operator Instruction)

Speakers at this time, we have no further questions in the queue.

Robert C. Rowe -- President and Chief Executive Officer

Well thank you all very much for joining us and for your interest over the quarter. It is finally springtime in the Rockies and on the Great Plains. So we're looking forward to enjoying that over the weekend.

Brian B. Bird -- Chief Financial Officer

Take care.

Operator

Thank you very much. Ladies and gentlemen, this now concludes today's conference. You may disconnect your phone lines and have a great rest of the week. Thank you.

Duration: 55 minutes

Call participants:

Travis Meyer -- Investor Relations

Robert C. Rowe -- President and Chief Executive Officer

Brian B. Bird -- Chief Financial Officer

Nick Campanella -- Bank of America -- Analyst

Michael Weinstein -- Credit Suisse AG -- Analyst

Jonathan Garrett Reeder -- Wells Fargo Securities -- Analyst

Vedula Murti -- Avon Capital -- Analyst

Paul Patterson -- Glenrock Associates -- Analyst

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