Jul 30, 2010
Executives
Dan Rausch - IR Bob Rowe - President & CEO Brian Bird - VP & CFO
Analysts
Chris Ellinghaus - Wellington Shields Paul Ridzon - KeyBanc Ryan Rosenthal - Sidoti & Company Brian Russo - Ladenburg Thalmann James Bellessa - DA Davidson & Company Jonathan Reeder - Wells Fargo Kyle Henderson - Praesidis Asset Management
Operator
Ladies and gentlemen, thank you for standing by and welcome to the NorthWestern Corporation's Second Quarter 2010 Financial Results Conference Call. At this time, all participants are in a listen-only mode.
(Operator Instructions) As a reminder, this conference is being recorded. And I would now like to turn the conference over to your host, Mr.
Dan Rausch. Please go ahead.
Dan Rausch
Good morning and welcome to NorthWestern Corporation's June 30, 2010 quarter-end financial results conference call and webcast. NorthWestern's results have been released and that release is available on our website at www.northwesternenergy.com.
We also filed our 10-Q yesterday. Joining us today on the call are Bob Rowe, President and CEO; Brian Bird, Chief Financial Officer; Dave Gates, Vice President of Wholesale Operations and Kendall Kliewer, Controller.
This presentation contains forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based upon our current expectations and speak only as of this date.
Our actual results may differ materially and adversely from those expressed in our forward-looking statements as a result of various factors and uncertainties, including those listed in our annual report on Form 10-K, recent and forthcoming 10-Qs, recent Form 8-Ks, and other filings with the SEC. We undertake no obligation to revise or publicly update our forward-looking statements for any reasons.
Following our presentation today, those joining us by teleconference will be able to ask questions. A replay of today's call will be available beginning at Noon Eastern Time today through August 29, 2010.
To access the replay, dial 1-800-475-6710 and then access code 163720. Those numbers again are 1-800-475-6701 and then the code is 163720.
A replay of today's webcast is also going to be available on our website for about the next month. And with that, I'll turn it over to President and CEO, Bob Rowe.
Bob Rowe
Thank you, Dan. We're really quite please with our results for the second quarter and in addition to our financial results, we have several non-operational success that I will mention in just a moment.
And we made significant progress on the Montana rate case since the last time we spoke. First, starting with the financial results, our net income improved to $11.7 million for the second quarter of 2010, and that's compared with 6.1 million for the second quarter of 2009.
This was primarily due to improvement in income tax expenses and in operating, general and administrative expenses. We've announced our third quarter of $0.34 per share and that's payable on September 30 for shareholders, a record as of September 15.
And during 2009, our quarterly dividends were $0.335 per quarter. Also, early in the quarter, we were added to the Standard and Poor's small cap group of 600 stocks.
And finally, Forbes.com has included us on their list of 100 Most Trustworthy Companies. Both of these are good indications of the progress we have made of our future direction.
And particularly, the Forbes.com recognition, I think, is a great testament of the integrity of our employees and our Board of Directors. Now, I am going to turn the call over to Mr.
Brian Bird to discuss our 2010 financial results in more detail.
Brian Bird
Thanks Bob. We reported diluted EPS of $0.32 a share during the second quarter of 2010 compared to $0.17 a share in the second quarter of 2009.
So, basically earnings increased $0.15 per diluted share on year-over-year basis. Let me give you a quick overview of the largest drivers.
Reduced operating costs, including benefits, legal costs, pension costs, and plant operations contributed about $0.08 per diluted share compared with second quarter 2009. Allowance for funds, used during construction or in other words, AFUDC, benefitted our earnings by about $0.06 a share, primarily, related to the Mill Creek Generating Station between decreasing interest expense and adding to other income.
We expect to capitalize another 6 million of AFUDC related to Mill Creek through the remainder of the year. Release in valuation allowance against certain state net operating loss carry-forwards benefitted net income by approximately $0.06 per diluted share compared with the second quarter of 2009.
Also, we had continued tax benefits for repair costs due to flow-through regulatory treatment, which contributed about $0.03 per diluted share compared with second quarter of last year. In the second quarter of 2010, we benefitted from the absence of a 2009 $0.02 per diluted share loss on a natural gas capacity contract.
Offsetting those improvements or increases to second quarter 2010 earnings included higher qualifying facility supply costs of approximately $0.06 per fully diluted share compared to second quarter of '09. And a net decrease of about $0.06 per fully diluted share in our earnings due to the increase in property taxes caused by an increase in asset property values in Montana.
And this is the net result of our property tax tracker which has reflected in gross margin. And you can tell from our press release and our 10-Q filing, there were other increases and decreases to earnings year-over-year, but these were the most significant drivers.
Now let me talk to you about our 2010 earnings outlook. We are reaffirming our fully diluted earnings per share for 2010 in the range of $1.95 to $2.10 per fully diluted share.
Major assumptions include but are not limited to the following expectations. No impact from either the interim rate increase granted or the requested rate increase because the increase is subject to refund the customers based on the final decision of MPSC expected during the fourth quarter of 2010.
The release of valuation allowance against certain state NOL carry-forwards is not included in the earnings outlook. However, the tax benefit associated with the IRS approval of the tax accounting method to deduct repairs is included outlook.
Fully diluted average shares outstanding of 36.5 million and of course normal weather in the company's electric and natural gas service territories for the remainder of 2010. Now let me move our attention to the balance sheet.
We have total liquidity of approximately 170 million, with cash of 6 million and 164 million available from our revolver at the end of the second quarter. Total debt at June 30, 2010 was slightly over 1 billion compared with 987 million at December 30, 2009.
Company maintains a long-term debt to total capitalization ratio of approximately 55% at June 30, 2010. We closed our previously announced refinancing in May.
The interest rate is 86 basis points lower than the previous rate and we reduced our interest expense on that portion of our long-term debt by approximately $2 million annually. In addition, we now have no significant long-term debt maturities until 2016.
With this refinancing over the last five years, we have reduced our weighted average coupon to more than 100 basis points to 5.6%. Cash provided by operating activities totaled 132.5 million for the six months ended June 30, 2010 as compared with 85.5 million during the sixth months ended June 30, 2009.
This increase in operating cash flow is primarily related to contributions of 53.2 million to our pension plans during the second quarter 0f 2009. Because of our substantial contributions in 2009 to our pension, we expect future pension contributions to be significantly less going forward or approximately $10 million annually in 2010 and beyond.
We've already paid approximately 10 million for the pension in the first six months of 2010 which is all we've planned to fund for this year. Cash used in investing activities increased by approximately 7 million as compared to six months ended June 30, 2009 due primarily to increased property, plant and equipment additions related to the Mill Creek Generating Station project.
Cash used in financing activities totaled approximately 14 million in the first six months of 2010. This compared with cash used in financing activities of approximately 27 million during the six months ended June 30, 2009.
During the first half of 2010, the company paid dividends on common stock of 24.5 million. With that, let me now turn it back to Bob.
Bob Rowe
Thank you Brian. We just concluded a very successful Board of Directors meeting in Brookings, South Dakota and that gave us, Board members, the opportunity to meet with more of our skilled employees and customers.
It is always, the Board is extremely impressed with our employees and with the vibrancy and support that we receive in our communities. I'll start by giving update on the Montana rate case.
As you all know, in October 2009, we filed a request with the Montana Public Service Commission for an annual electric transmission and distribution revenue increase of $15.5 million and an annual natural gas transmission, storage and distribution revenue increase of $2 million. And that request was based on a 2008 test year and included a return on equity of 10.9% and an equity ratio of 49.45% on a rate base of 632.2 million on the electric side and 256.6 million on the natural gas side.
We've recently reduced our revenue increase request as part of rebuttal filing to 13.1 million electric and 1.5 million natural gas. This was due to known and measurable expense changes that had occurred since the end of the 2008 test year.
So, we've decreased our total annual revenue request by about $2.9 million from the original request. In July, the Commission voted to approve an interim rate increase of 12.4 million electric, and 1.4 million natural gas, and that is subject to refund.
Interim rates went into effect on July 8. We will defer recognition of the interim payments that are being received because of the payments are subject to refund and because of the Consumer Council's position actually was calling for a decrease of $2 million on the electric and $3 million on the gas side.
So, based on those factors we concluded, the prudent thing to do was to defer recognition of the interim payment being received. Hearing is scheduled for middle of September.
We expect, after preparation of the transcripts and briefing, the Commission will issue an order during the fourth quarter. Now, I'll provide an update on various rate base investment initiatives.
As many of you know, we're constructing a natural gas fire regulating plant in Montana and proposing and moving ahead on three transmission projects. First, turning to the Mill Creek Generating Station, we kicked off construction at Mill Creek in July 2009.
As of June 30, 2010, we capitalized approximately $147.2 million in construction work and project and process related to the project. And that project is currently on schedule for all construction aspects of the plant.
And we're planning to make the appropriate regulatory filings to have rates and tariffs in place by January 1, 2011. The total capital cost of the project is expected to be approximately 202 million upon completion and the plant is scheduled to be operational around the end of the year.
Turning next to transmission, as you know, we have three proposed transmission projects and those are an upgrade to the existing 500-kV Colstrip Transmission line, second, the Montana Collector system and third, the Mountain States Transmission Intertie or MSTI. I'll discuss each of those project specifically but I'll begin by giving you an overview of the general state of transmission.
There are several broad factors affecting the currently pending open seasons for Collector and MSTI that has caused us to consider extending those processes. And those factors are, first the MSTI siting delays.
We had anticipated having a graph of EIS and a preferred route by this time. Due to challenges to the siting process that will occur, we believe, in the fall of this year at the earliest and for the agency to actually issue draft EIS.
And to provide prospective customers indicative tariffs, we need to know the cost of the facility, the cost we need to have a fairly well defined route. Second factor is simply the general economic conditions and the general slowdown in the economy and the tightening of credit for project developers have combined to make it more difficult for generation developers to make long-term commitments.
And we obviously need long-term commitments in order to manage the project. Third factor is market confusion, particularly, associated with confusion in the California market.
That's, again, made it difficult for generators to understandingly the probability and means of accessing that large market. And fourth is simply the uncertainty around Federal policy and prospects for Federal legislation versus, you all know, that's the subject that changes virtually day-to-day.
With that as an overview, I'll turn first to the Colstrip 500-kV upgrade. Current focus there is on the Colstrip Transmission Agreement and the Montana Intertie Agreement, along with various technical studies.
The transmission customers would very much like to see the Montana Intertie rate rolled into the Bonneville Power Authority or BPA's transmission network during the BPA rate case that starts this year and culminates next year. And that would address the issue of rate, then, taking over the system.
We are making progress with the Colstrip Transmission owners and anticipate filing necessary amendments to the existing agreement later this year. The study work we anticipate will also be completed this year.
Our capital cost of the project is estimated to be approximately $38 million out of a total project cost of $125 million. We've indicated that we would take their pro rata share.
Any of the Colstrip partners who choose to decline to participate in the upgrade, commencement of construction is planned for the summer of 2011 or as soon as the study work can be completed. And the upgrade of the system would be completed sometime in 2010.
As you know, we're also evaluating construction of a Collector system, essentially feeder lines to gather renewable generation in Montana. The mission we kicked off an open season for both Collector and MSTI in the second quarter of this year.
I expect to have results by the end of 2010. We expect FERC filings related to the procedural aspects of Collector early in 2011.
Our assumed capital on the first identified line of the system would be approximately $200 million. Ultimately, that could by up to five Collector lines envisioned for entire system in Montana.
But again the focus right now is on the first of those potential projects. Pending a positive outcome of the open season, the line could be operational as early as the second quarter of 2010.
Final Transmission Project, Mountain States Transmission Intertie or MSTI, and again, consistent with Collector, we initiated the open season in April. We expect those results are around the end of this year.
We expect FERC filings on the open season process for MSTI in 2011. As I mentioned, the Montana Department of Environmental Quality process has been slowed by litigation brought by Jefferson County of Montana against the State DEQ related to the County's ability to become more involved in siting and routing.
That case is currently in State District Court and will likely have an impact on the timing of the release of the Draft Environmental Impact Statement. The Federal BLM has informed us that their final draft of EIS will be delayed until most likely September, as they work through some final issues.
As we've discussed previously, we continue to consider potential strategic partners who are interested in co-investing in the project and we will decide on a strategic partner before any major capital commitment. MSTI could be in service by the end of 2015, but the exact date, of course, will depend on a number of factors, I would say, especially including when that makes the most sense in the market.
Turning now to plans to address supply needs of our customers over the next several years, first I will give you an update on the work around emissions reduction that may be required at the Big Stone plant in South Dakota. I raised this topic on the last call of course.
As you know, the Clean Air Visibility Rule was issued by the EPA in June of 2005, requiring certain generating units to achieve emissions reductions from designated sources that are deemed to contribute to visibility impairment in Class 1 air quality areas. We have a 23.4% interest in Big Stone.
And that is a 454 megawatts coal fired power plant located in Northeastern South Dakota. The estimated capital expenditure for the Best Available Retrofit Technology or BART, based on the Department of Environmental and Natural Resources proposal from the States, are currently in the $200-300 million range for Big Stone all in.
And our share of that would be in the $50-75 million range. Importantly, these numbers are preliminary.
We should have more precise figure once the owner's initial design firm, which is Sargent & Lundy, has completed its initial engineering early in the fall. Any improvements need to be installed and operating as expeditiously as practical, but no later than five years from the EPA's approval of the South Dakota Regional Haze State Implementation Plan of SIP.
That in turn is expected no later than January 15, 2011. If the emissions reductions technology, as described, is required, we will seek to recover those costs through the rate-making process in South Dakota.
And the South Dakota PUC has allowed recovery on a timely basis of the cost of other environment improvement previously. Similarly, to Big Stone, in South Dakota we are co-owners of a coal plant Neal 4, which is located in Northwest Iowa, and there too we're investigating and installing the scrubber, most likely in the 2013 to 2015 time frame and the project would have an overall scope and design similar to Big Stone.
Preliminary cost for that project which is being developed now, the permitting and request for proposal processes are in the early stage in the development. We're only 8.6% owner of that 55 megawatt out of 655 megawatt facility.
So, our capital portion is not likely to be significant. Turning now to renewable supply, for electric supply in Montana, we have a request for information to add up to 75 megawatt renewable power.
We're looking particularly for cost-effective renewable project to help us meeting increasing customer demand and that also allow us to further diversify our portfolio in the first meet state renewable standards. We prefer to purchase the projects outright but we would consider other options including equity interest in long-term PPAs.
Currently, we winnowed Montana selection process to shortlist the finalists in active discussion there. In South Dakota, we've decided to terminate similar RFI for 2010 based on load projections.
But we will continue to evaluate the need and anticipate issuing a new RFI in appropriate time in the future. Also, in South Dakota, however, we have noted previously that we are doing preliminary engineering work for a peaking facility near Aberdeen about 60 megawatts and that could be in service possibly in 2012.
Turning to natural gas reserves, we are interested purchasing gas reserves to provide price stability for customers in Montana. A former Montana power company owned natural gas reserves in the past.
The State of Montana consistent with its direction on owning electric supply would also like to see the company own in rate-base gas reserves with the area around our service territory as field and many 1.5 Montana Power owned and we have employees with direct experience, owning and operating the field. So, again we are actively looking and those, obviously we have to re-project to be sensible both for us and for our customers.
As the volatility of gas prices over the past several years certainly has created significant changes in customer's monthly bills over time. But we want to be clear as we said before.
We're only looking at proven reserves that can be rate based. We are not considering getting into the exploration and production business.
Considering our core distribution business, we've been investing CapEx in excess of current depreciation every year since 2002. We've planned to invest about $124 million in the core distribution business in 2010.
That's up from $109 million in 2009. We're investing in more automation, outage prevention and monitoring throughout our system.
To that end, we're participating in a regional workgroup on the Pacific Northwest, facilitated by Battelle, working through valuation of various smart grid applications and we're including two areas, one urban area and one rural area as part of the regional pilot program. So, as a result of that, over the next two years we expect to much better understand how we can deploy this new technology, affordably and effectively to customers throughout our service territories.
NorthWestern plans to test the operational efficiency in customer's services enhancements that may be gained by the installation of technology to enhance communication between the utility and the meter. So, in summary we are sure you are once again waiting to here.
Our good financial results provided us a very strong start to 2010. Our cost controls and tax positions have positioned the company to achieve our earnings guidance range for the year.
And with that we reaffirm our guidance for 2010 to be in the range of $1.95 to $2.10 fully diluted. And we are comfortable we can land in that range without consideration of the interim rates or the rate case pending in Montana.
And we made that decision for the events I described. Mill Creek continues to be on budget and on time and we're pursuing opportunities to provide our retail customers with long-term supply price stability and to increase our rate-based assets.
Also, as noted, we had non-operational successes including being added into the S&P SmallCap 600 and the recognition by Forbes.com as one of the 100 Most Trustworthy Companies. We're very pleased with where we are in 2010 and looking forward to the future.
With that, I would now like to open the call and look forward to any of your questions and comments.
Dan Rausch
Rachel, we're ready for questions whenever you are.
Operator
Okay. (Operator Instructions) Question comes from the line of Chris Ellinghaus of Wellington Shields.
Please go ahead.
Chris Ellinghaus - Wellington Shields
Hey, guys, how are you? Brian could you just refresh our memory in terms of how you see the repair benefit, tax benefit going forward?
And have you updated your expectations at all for this year?
Brian Bird
On the repair side, Chris we haven't updated our expectations. Obviously, we're seeing the benefit to the first two quarters because we did make an adjustment into the second half of last year.
So, I would continue to see a similar benefit on a quarter-to-quarter basis.
Chris Ellinghaus - Wellington Shields
From the second quarter?
Brian Bird
Yes.
Chris Ellinghaus - Wellington Shields
Okay. And just talk about how the tax benefit will affect the tax rate going forward in future years?
Brian Bird
We've noted last because of the repairs itself that the tax rate would hover around 30% and overtime would increase. Because of the reserves, valuation allowance reserves released this year, our tax rate will be less than 30%.
Chris Ellinghaus - Wellington Shields
Okay. And any clarification or color on how you see the tax benefit sort of devolving overtime?
Brian Bird
Well, this year the valuation reserves release is a one-year item only and that's why it's not going to be included in guidance. We're not considering that.
My expectation is we're going to see a tax rate that's going to be closer to 25% than 30% in 2010. And now I would tell you that back in 2011, our expectation is just you are back to around a 30% rate that increases overtime.
Chris Ellinghaus - Wellington Shields
Okay. Also, relative to the earnings reconciliation, I didn't read anything in the press release or in the Q that sort of discussed any kind of insurance or legal recoveries for the second quarter.
But the decrement or incremental impact of the insurance recoveries in the reconciliation said $1.8 million. But I thought last year you had something like a $3.5 million insurance recovery in the second quarter.
What's the discrepancy between those two numbers?
Brian Bird
I don't recall the second quarter item. I can tell -- let's speak to the 1.8 that's in the net income and that's on the six months number.
And I think you're talking about, that's in the insurance reserves not in the recoveries, correct?
Chris Ellinghaus - Wellington Shields
It's in the line that says insurance recoveries and settlements which is 1.8 million pre-tax. And I thought, last year, in the second quarter you had a more significant, I don't remember if it was a reserve or recovery, but I think it was a recovery last year.
So, I was just wondering if the difference between those two numbers meant that there was any kind of insurance or legal issues benefits for this quarter.
Brian Bird
Now, as you know, we have pointed out. We have a decrease in insurance recoveries on a pretax basis of 1.8 for the three months, correct?
Chris Ellinghaus - Wellington Shields
Right.
Brian Bird
In the second quarter, and as we pointed out in the Q, that decrease means that we had a recovery in the second quarter of 2010 but it was certainly less than the 4.4 million recovery that we had in the second quarter of 2009.
Chris Ellinghaus - Wellington Shields
Okay, great. Thanks.
All right, thanks guys.
Brian Bird
Thank you.
Operator
Okay. Thank you.
Next question comes from the line of Paul Ridzon of KeyBanc. Please go ahead.
Paul Ridzon - KeyBanc
What drove the decision to release the reserves on the NOLs? Was there an event or just something that made you feel better about the credibility of those?
Brian Bird
Yeah, the thought process is when we initially setup our reserves, we weren't sure in terms of what amount of taxable income we would have from Montana business as we evaluated our earnings for 2010, we looked closely at the reserve and we are comfortable with releasing portions of that.
Paul Ridzon - KeyBanc
And where did that flow through the income statement?
Brian Bird
It flows right into tax expense line.
Paul Ridzon - KeyBanc
Okay. So that $0.06 is going to fully manifest itself, just through a lower tax rate.
Brian Bird
That is correct.
Paul Ridzon - KeyBanc
Okay. And can you just discuss -- when do customers start to see the benefit of the change in tax methodology?
Will that be January 1, or is that July of 2010 when interim rates hit?
Brian Bird
I think you may remember, Paul, that we reduced our ask, if you will, from the rate increase as a result of the tax benefits flowing through the customers. So, it's already being reflected in the interim rates.
Paul Ridzon - KeyBanc
Okay, so --
Bob Rowe
Yeah, in fact, we actually delayed the filing to revise the initial application, in order to capture that benefit up front for customers
Paul Ridzon - KeyBanc
And when do you expect the next update on just how open season's going? Is that going to be the third-quarter call?
Bob Rowe
We'll certainly give you an update in each call. But for the reasons I discussed, I think the sensible thing to do is to leave the open season open for an extended period just to get more clarity in the market.
Paul Ridzon - KeyBanc
Okay. Thank you very much.
Bob Rowe
Thank you.
Brian Bird
Thank you.
Operator
Thank you. Next question comes from the line Ryan Rosenthal with Sidoti & Company.
Please go ahead.
Ryan Rosenthal - Sidoti & Company
Good morning. My question concerns going back to the NOL valuation balance release.
In the release, you guys discussed that it is not included in your earnings guidance for the full year. Is that inclusive of the $0.06 benefit during the second quarter, so essentially you're excluding any benefit from that for the full-year guidance?
Brian Bird
Yeah, we are excluding that benefit. So, that's $0.06.
As we looked at our results and reaffirmed our guidance, we concluded that $0.06 would be excluded.
Ryan Rosenthal - Sidoti & Company
And turning to the $0.06 tracked in the qualifying facility supply cost, can you address the short-term trends for your qualifying facilities and how you see that moving from here?
Brian Bird
Yeah, it's difficult to say on a year-over-year basis. I can't tell you in the going forward basis, but our expectations and we had -- for this year, we recorded the first half of the year.
We do that every June and we get the higher prices and higher volumes from our QFs, we didn't have an adjustment this year.
Ryan Rosenthal - Sidoti & Company
And turning to the MSTI project and the Collector system, would you suggest that carbon legislation's been slower than you initially anticipated and that it might require some certainty in terms of legislation before you'll get sufficient commitments to move forward with MSTI?
Bob Rowe
Federal legislation around carbon and around transmission is certainly one of the important factors for anyone committing their capital to build their plant. At the start of the Congress, I certainly recognized that uncertainty is the name of the game.
But that has absolutely been one of the factors affecting the ability and decision making of the perspective developers.
Ryan Rosenthal - Sidoti & Company
Okay. And --
Bob Rowe
If you have any thoughts as to where Federal legislations might be heading, we would certainly welcome those too of course.
Ryan Rosenthal - Sidoti & Company
I'm sure you're more knowledgeable about it than I am. And then one final question concerning the gas reserves -- is there any timing in terms of when you might be able to add something to your rate base there?
And also if you'd give us a sense of what the scope or scale might be?
Bob Rowe
Sure, we can't comment on any specific negotiations. What I can say is that we're actively looking at opportunities, I thought is we would probably bring on incremental resources, layering in probably relatively small additions overtime.
And those would be layered in basically on top of existing supply contract in our portfolio. And then that would, again, transition from pass-through expense into rate base supply with earnings.
Ryan Rosenthal - Sidoti & Company
Thanks for your time.
Bob Rowe
Thank you.
Brian Bird
Thanks Ryan.
Operator
Alright, thank you. And the next question comes from the line of Brian Russo of Ladenburg Thalmann.
Please go ahead.
Brian Russo - Ladenburg Thalmann
Hey, good morning guys.
Brian Bird
Brian.
Brian Russo - Ladenburg Thalmann
Just can you maybe comment a little bit on the recent [IRT] filings and when you expect to need any additional meaningful generation in Montana? And then maybe just comment on maybe the support for NorthWestern to own steel in the ground versus reliance on PPAs, and then, lastly, discuss the contract you have with PPL Montana that expires in 2014?
Bob Rowe
I think it's fair to say that there is strong support in Montana for own resources given the experience with the deregulation experiment. And that obviously is reflected initially in legislation on the electric side than on the gas side several years ago, reflected in good forward-looking decisions from the Montana Commission, both considering Colstrip 4 and then concerning Mill Creek.
We're in, Montana, really pretty unique situation as a utility looking at, again, moving from pure purchase to much greater ownership or resources. And that makes the entire resource planning process, I think, just different from us than other utilities there, really looking more at dealing with low growth and plant retirements.
For example, the supply plan that we filed in Montana. You can think of it as kind of a roadmap.
Its focus is going to include in the near-term, much more detailed analysis of needs around a gas plant. The specific need would be certainly by 2014, possibly earlier.
We're very interested in the idea of kind of project banking so that as the need becomes more imminent, the lead time is shorter. I've already talked about our goals for 2011 in terms of bringing on some significant incremental win, trying to clarify risks around carbon, again, will be another important aspect for next year and then dealing with heavy load needs in particular.
We like in many ways, where we said because, you know, the PPL contracts roll off, we've got a good systematic approach to looking at those and other resources in the regions as well. But we're not in any way dependent on any one particular supplier over the long-term with opportunities to purchase from other resources and then obviously, most importantly opportunities to invest directly.
Brian Russo - Ladenburg Thalmann
In terms of the PPL Montana contract, when you looked at kind of the forward curves in 2014 or '15, is that contract above or below market? Hello?
Bob Rowe
Right now, the contracts appears to be really pretty close to market.
Brian Russo - Ladenburg Thalmann
Okay, are there any environmental upgrades necessary on Colstrip?
Bob Rowe
No.
Brian Russo - Ladenburg Thalmann
Okay, great. And then just -- it seems as if the MSTI project, the advancement of the development stages, some of which are in your control, others seem to be more reliant on forces that are out of your control, and I guess I understand the importance of pushing through the permitting stage.
So if and when that project does potentially be harvested, you've got all the permits in place. But is there a way maybe you can prioritize the projects that you laid out earlier as the most likely to succeed down to the least likely to succeed, or earliest timing to latest timing?
Bob Rowe
I would say timing is probably the better way to look at them. And I discussed them more or less in sequence.
And that would be, again, the Colstrip upgrade first, the north Collector line second, MSTI third. And you're completely right, that we're focusing on the parts of the projects that are really the heavy lifting, and that is particularly the siting process.
What I like about the project -- I think MSTI is, I suppose, the most visible. We have a lot of ability to control our capital commitments and to layer that project on top of things or other things we're doing in our system.
Again, depending ultimately, when the market actually develops. But, in terms of critical path, the things we're focusing on now at really pretty modest capital commitments are the key activities.
Brian Russo - Ladenburg Thalmann
Okay, great. Thank you very much.
Bob Rowe
Thank you.
Operator
Thank you. Next question comes from the line James Bellessa of DA Davidson & Company.
Please go ahead.
James Bellessa - DA Davidson & Company
Good morning.
Bob Rowe
Good morning.
Brian Bird
Morning, Jim.
James Bellessa - DA Davidson & Company
Going back to the release of the reserve valuation, you've indicated that it took -- it added $0.06 per share to the first half, and you're also indicating in your narrative in the Q that the amount could be about the same in the second half. So if I'm understanding correctly, your guidance range of $1.95 to $2.10, if your forecast is correct, will be exceeded by roughly $0.12 a share by the end of the year.
Brian Bird
It's exceeded that, but I'd rather say it this way. The $1.95-2.10 will exclude $0.12, again, if that reserve is equal to the $0.06 in the first half.
That $0.12 will be excluded from that range. That answered your question, Jim?
James Bellessa - DA Davidson & Company
Yes. And Jefferson County, if their NIMBY attitude prevails, what are your alternatives for the MSTI line?
Bob Rowe
It's impossible to answer that question directly without an awful lot of speculation. I'll say a couple of things.
First, do we have confidence in the Q process? There will be, at some point, a recommended route coming out of that.
Secondly, we absolutely acknowledge concerns and interests of landowners adjacent to any of the potential routs. As you know, Jim, we had over 60 community meetings so far.
We continue to be active trying to provide information and do what we can to address landowner concerns when there is a recommended route of there'll be a comment period. At that point, we'll be able to speak much more specifically to concerns about an identified route.
So, that would be an important next step in the process.
James Bellessa - DA Davidson & Company
Correct me if I'm wrong. Is Townsend in Jefferson County or right next to Jefferson County, and so anything going westward has to go through Jefferson County, or can you go around Jefferson County?
Bob Rowe
Townsend is in fact in Broadwater County. There are a number of routes on the table.
Not all of which are would be affected by the litigation at all. And again, with the County, they're asking for, at this point, is really a question of interpretation of the Siting Act, having to do with the nature and extent of consultation with the County.
They effectively are saying that they want a larger role in the process. They're not speaking so much to a particular route.
James Bellessa - DA Davidson & Company
In your narrative, you talked about property taxes going up and claiming that the Mill Creek facility's tax was part of that -- that factored in. Do the State of Montana charge property taxes before you complete a project?
Brian Bird
Yeah, there is an assessment for it. The plants in construction, there will be an assessment for that portion of it that was completed during the year.
James Bellessa - DA Davidson & Company
So you're reserving for the portion of the plant that's completed up to now? Is that what's happened?
Brian Bird
That's correct.
James Bellessa - DA Davidson & Company
This peaking facility in Iowa, I think you said 50 megawatts -- what was the date that you might be able to have that completed? And is it earlier than previously expected?
Brian Bird
Jim, the Neal plant is the plant in Iowa. The peaking we are talking about is in South Dakota.
James Bellessa - DA Davidson & Company
Okay, South Dakota, I'm sorry.
Brian Bird
No problem. And I think that's pretty much in line with our expectations that we provided in the past.
James Bellessa - DA Davidson & Company
And what is the date that it would be completed?
Brian Bird
2012 is the time period because we have a capacity contract that expires at approximately the same time that the speaker would come online.
James Bellessa - DA Davidson & Company
Thank you very much.
Operator
Okay, thank you. And the next question comes from the line of Jonathan Reeder, Wells Fargo.
Please go ahead.
Jonathan Reeder - Wells Fargo
Good morning, gentlemen. A couple more clarifications, if you don't mind.
First off, on the NOL valuation allowance release, was that the full reason for the effective tax rate dropping from 30% to 25%?
Brian Bird
Well, yes. We had repairs, tax benefits in line with our expectations.
So, the drop was as a result of the reserved valuation.
Jonathan Reeder - Wells Fargo
Right, I'm just making sure there's not anything else in there besides that causing that 5% drop.
Brian Bird
No.
Jonathan Reeder - Wells Fargo
Okay. Then on MSTI, if I heard you correctly, Bob, the pushback is now to the end of 2015 at the earliest.
And is that just purely reflective of the draft EIS delay?
Bob Rowe
Primarily, and, again, the big health warning is that the project or other major projects will be constructed when it makes sense in the market and the continuing to focus on the key siting and related activities now really will provide us that flexibility to meet the market when it's ready.
Jonathan Reeder - Wells Fargo
Right, so assuming the market's ready and everything and you get the draft EIS now and you're expecting the earliest kind of could be at the end of 2015, right?
Bob Rowe
Yes.
Jonathan Reeder - Wells Fargo
Okay. And then lastly, if you don't mind, could you kind of discuss in the Montana rate case the decoupling mechanism proposal and kind of what the prospects are for getting one approved?
Bob Rowe
Sure, little additional flavor there. Of course, in the rate case, there are basically three buckets of issues, revenue requirements, allocated cost of service, rate design.
Interveners in the rate case as part of the third bucket proposed decoupling, and the idea there is to essentially make the utility neutral as to efficiency investments. Now, it's important to note that we actually already have a lost revenue adjustment mechanism, which provides some of the benefits of decoupling.
Individual commissioners, obviously, haven't prejudged the issue, but as they look at policy they've been interested in seeing some kind of a decoupling mechanism presented to us. We think that the proposal of the interveners have put forward, has a lot of merit.
As are other utilities, we're doing an awful lot around energy efficiency. What we continue to say is the three basic things a company needs are first of all confidence about Reg cost recoveries.
Second, being kept neutral to loss revenues associated with volumes, and then third, something to make the efficiency program an attractive business to be in, so, some kind of an incentive or a return. And decoupling mechanisms speaks particularly to the second part of that.
Again, the Commission hasn't weighed in on a particular mechanism, but this case provides a good opportunity for them to really take a sharp look at this specific proposal.
Jonathan Reeder - Wells Fargo
When you're referring to the interveners, are you including the MCC in that bucket as well? Because I was thinking I read in the MCC testimony that they're -- it appeared they were kind of against the decoupling mechanism for the reasons you mentioned, that you have somewhat of a similar mechanism for recovering some of those DSM and efficiency investments already.
And then I thought they proposed that if it was approved, that they would want a reduction in the allowed ROE.
Bob Rowe
That's, I think, a good summary of the Consumer Council position. The proposal was offered by -- from District XI Human Resource Council, which is a long-standing participant in Montana rate cases on behalf of customers as well as Natural Resources Defense Council.
And again, I noted, we have an existing lost revenue adjusted mechanism. We support the idea of the decoupling pilot.
We think it's a step forward. But we would not be able to accept decoupling, if that were associated with a reduction in ROE.
We think that is inappropriate and would really be a step away from the goals that the interveners are proposing decoupling are attempting to achieve.
Jonathan Reeder - Wells Fargo
All right, thank you for the additional insight.
Bob Rowe
Thank you.
Operator
Thank you. And the next question comes from the line of Kyle Henderson of Praesidis Asset Management.
Please go ahead.
Kyle Henderson - Praesidis Asset Management
Good morning.
Brian Bird
Good morning.
Kyle Henderson - Praesidis Asset Management
I wanted to get a couple questions in about your natural gas reserve rate base opportunity. Presumably these would be proven reserves that you'd be targeting?
Bob Rowe
Yes absolutely.
Kyle Henderson - Praesidis Asset Management
Okay. And so I guess then the cost of these would be capitalized and then added -- put in the rate base.
Bow Rowe
Right.
Kyle Henderson - Praesidis Asset Management
What kind of a magnitude are we talking on these?
Bob Rowe
We looked at opportunities of a variety of sizes. Montana power typically had about 50% of its overall gas demand met from own resources.
We're looking at projects substantially smaller. And I think can't really discuss specific project or dollar amounts.
We're taking, as we should, a very caution approach to that. But, overtime, we would hope to see really a gradual transition from pass-through to owned supply.
And again, given the anticipated future role of gas generation, that's another attractive way to potentially provide some price stability to our electric customers as well.
Kyle Henderson - Praesidis Asset Management
Yes, I don't really want to get you too far out there into the future. But if it's 50% or perhaps even substantially smaller than that, is that something you'd just be in the market for every year, sort of looking at small opportunities here and there?
Bob Rowe
Yeah, our participation in the market would certainly be ongoing until, at least at some point in the future we reached somewhere in the mid-50% range.
Kyle Henderson - Praesidis Asset Management
Okay. And you mentioned that because of some degree of history that you and your employees have had with this.
Do you have sort of a sense of what might be an indicative ROE or capital structure on these, for rate-making purposes?
Bob Rowe
We would presume the history of the -- I think we would basically want to get some more ROEs and capital structure and everything else that we are involved and as we would proposed to all those projects into our ongoing operations.
Kyle Henderson - Praesidis Asset Management
Okay, great. And with the reserves capitalized but the costs of extracting, processing, and delivering, would that be a pass-through kind of expense, or how would that be managed?
Bob Rowe
Yes.
Kyle Henderson - Praesidis Asset Management
Okay. And do you have sort of a timeline of when we could start to look for this?
Bob Rowe
Well, since we're out in the market, the timeline is going to be really driven more than anything else by when we were actually able to strike agreements. Again that makes sense not only for the company but for our customers in the long-term.
Just to reinforce one thing that you touched on, Montana Power, really was, quite unique in owning gas production and reserves, fuels. We're looking at a typically reasonably adjacent.
And again, we do have an awful lot of depth of experience within the company and we're trying to take advantage of that. We're not in anyway launching off into terra incognito in going after this.
Kyle Henderson - Praesidis Asset Management
Okay, very good. Thank you for your help
Bob Rowe
Operator
Okay, thank you. (Operator Instructions) And we have a follow-up from Paul Ridzon of KeyBanc.
Please go ahead.
Paul Ridzon - KeyBanc
Brian, you said you had an expectation how much more AFUDC was going to flow in the year. What was the number?
Brian Bird
Paul Ridzon - KeyBanc
Is that a pre-tax number?
Brian Bird
That is a pre-tax number.
Paul Ridzon - KeyBanc
How much have we done year to date?
Brian Bird
I think it's around 4, Paul.
Paul Ridzon - KeyBanc
And the peaker in South Dakota, that's still about a $50 million investment?
Brian Bird
Yeah, between 60 and 50.
Paul Ridzon - KeyBanc
60? And any way to triangulate on how big the CapEx opportunity could be for gas reserves?
Brian Bird
Can you say that again, Paul? I am sorry.
Paul Ridzon - KeyBanc
How much potential capital could you deploy for natural gas reserves?
Brian Bird
I mean, obviously, we're talking about, Paul; this is going to be a wide range. I mean, if you have approximately 20 Bcf of total needs and our expectation is to try to overtime to do half of that.
That could be a very broad range. And we're looking at both small opportunities and large opportunities to Bob's point.
It depends on what we're actually successful and actually agreeing to prices on many cases. These are bidding processes and we have to win and we're looking at a varied group of opportunities.
So, to give you a range it would be quite difficult. But if half of that, the 20 Bcf as you know is 10 and you have to kind of gauge anywhere between 1 to 10 Bcf of the opportunities that we'd be looking at.
Paul Ridzon - KeyBanc
What was the Iowa project that was mentioned?
Brian Bird
That's a Neal plant and there is environmental upgrades it maybe needed to that plant. And that Neal plant provides -- in our rate base, our ownership is in our rate base in South Dakota.
Paul Ridzon - KeyBanc
And how much could that --
Brian Bird
That could be -- it's relatively small. We have an 8.6% ownership in that plant and the amount is rather small.
At this point in time, we don't have an idea what the cost would be. Just to give you an idea that that's potentially coming.
Paul Ridzon - KeyBanc
And then in the second quarter of 2010, you had insurance recoveries of 4.4 million, less 1.8 million. Is that a pre-tax number?
Brian Bird
Actually -- yeah, the one point is the net. It's the pre-tax number.
It was 4.4 million in 2009 versus 2.6 in 2010. So, the 1.8 is the net pre-tax number.
Paul Ridzon - KeyBanc
Okay. Thank you very much.
Operator
Okay. Thank you.
And the next question is a follow-up from the line of James Bellessa of DA Davidson & Company. Please go ahead.
James Bellessa - DA Davidson & Company
Yes, it's about your tax rate going forward. You've indicated on this call and previously that in your current rate case, you reduced it for the tax benefit that you were receiving for the new accounting that -- for repairs that the IRS is allowing you.
Why does your tax rate in future years stay down at the 30% level? Why doesn't it go higher than that?
Brian Bird
We noted, Jim, that overtime as we make investments into growth projects, less of our capital would be going towards repairs projects. It's the repairs projects that helps keep your tax rate lower, right?
Because that's what you're going to need the deduction for. So, our expectation is we make investment into growth projects, that percentage of capital going to repairs would be less.
And so we'd expect to see our tax rate increase over time.
James Bellessa - DA Davidson & Company
But in the near term, you're calling for it only being at 30%, even if the rate decision goes your way this year, at the end of the year, next year you're calling for a 30% tax rate. Why isn't it going to 35%?
Brian Bird
Well, ultimately, overtime, it can creep back up to towards 35% overtime, Jim. But again, the deductions themselves are a $1 amount itself.
It's not a rate issue. It's a $1 amount issue.
So, again, if those repairs, which are pretty consistent on a year-over-year basis, but again, as portion of your capital is going to become a smaller portion of your capital on a going forward basis. So, ultimately that tax rate will increase up and ultimately, I think, we said in an earlier call, our expectation is it would be above 30% and would climb back up around 35% over the next five years.
James Bellessa - DA Davidson & Company
Thank you very much.
Operator
Okay, thank you. We have a follow-up from the line of Paul Ridzon of KeyBanc.
Please go ahead.
Paul Ridzon - KeyBanc
Thanks again, guys. What was the weather impact on this quarter?
Brian Bird
The weather, in fact, was pretty benign. Actually, we had about a $0.01 favorable impact in our gas business.
Electric was flat. But on year-to-date basis, that was a favorable impact for the second quarter on a year-to-date basis, we had about a $0.05 unfavorable impact on the first quarter also on the gas business.
It was mild during the first quarter. So, hopefully, that gives you a number for both the second quarter and year-to-date.
Paul Ridzon - KeyBanc
Is that versus normal or versus prior-year?
Brian Bird
That's versus normal.
Paul Ridzon - KeyBanc
Okay, thanks again.
Operator
Okay, thank you. (Operator Instructions) There are no further questions.
Please continue.
Bob Rowe
Okay, well, thank you all very much. Again, it was a good quarter.
We look forward to visiting with you again next quarter.
Operator
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