Jul 26, 2017
Executives
Travis Meyer – Director of Investor Relations Bob Rowe – President and Chief Executive Officer Brian Bird – Vice President and Chief Financial Officer
Analysts
Mike Weinstein – Credit Suisse Chris Ellinghaus – Williams Capital Brian Russo – Ladenburg Thalmann Paul Patterson – Glenrock Associates Paul Ridzon – KeyBanc Jonathan Reeder – Wells Fargo
Operator
Good day and welcome to the NorthWestern Corporation Second Quarter 2017 Financial Results Conference Call. Today’s conference is being recorded.
And at this time, I would like to turn the conference over to Mr. Travis Meyer, Director of Investor Relations.
Please go ahead, sir.
Travis Meyer
Thank you, Matt. Good afternoon and thank you for joining NorthWestern Corporation’s financial results conference call and webcast for the quarter-ended June 30, 2017.
NorthWestern’s results have been released and the release is available at our website at northwesternenergy.com. We also released our 10-Q pre-market this morning.
On the call with us today are Bob Rowe, President and Chief Executive Officer; Brian Bird, Vice President and Chief Financial Officer; along with several other members of our management team in the room 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 will remind you of our Safe Harbor language. During the course of this presentation, there will be forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements often address our expected future business and financial performance and often contain words such as expects, anticipates, intends, plans, believes, seeks or will. The information in this presentation is based upon our current expectations of the date hereof and unless otherwise noted.
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 on the Company’s Form 10-K and 10-Q along with other public filings with the SEC.
Following our presentation, those who are joining us by teleconference will be able to ask questions. The archived replay of today’s webcast will be available beginning at 6:00 PM Eastern time and can be found again at our website northwesternenergy.com, under the Our Company, Investor Relations, Presentations and webcast link.
I will now hand the presentation over to our CEO, Bob Rowe.
Bob Rowe
Thank you, Travis, and thank you all for joining us this afternoon. And today we’re calling in from our division operations office in Helena, Montana, where our Board has been meeting this week.
As you know, we’ve had three new additions to the Board of Directors in recent months, and they are tremendous contributors to a board that, again, based on the discussions over the last several days, really is an ideal board for this company at this time. As we usually do, our board members spent a great deal of time both in the meetings, but also meeting with community leaders, and I met them the other night, where there were local business and public officials but also key officials from the state level.
And then they spent some time in our hydro operations visiting some of the hydro crew, and then, this morning, had a fantastic, a very lively discussion with our employees – our operations employees in Helena. Turning to recent significant activities.
First, net income for the second quarter was $21.8 million or $0.44 per diluted share. That is as compared with net income of $35.6 million or $0.73 per diluted share for the same period in 2016.
The $13.8 million decrease in net income is primarily due to the recognition in 2016, last year, of $14.2 million of deferred revenue as a result of Montana Public Service Commission final order in our tracker filings lower – in addition to lower retail electric volume and higher operating expenses so far in 2017. Non-GAAP adjusted EPS decreased from – decreased $0.18 to $0.47 as compared with $0.65 for the same period in 2016.
The board approved a quarterly stock dividend of $0.525 per share, payable September 29 of this year. And then, importantly, on July 20, the Montana Public Service Commission did vote to modify the settlement – to approve and modify the settlement agreement in our Montana natural gas rate case, resulting in an estimated overall annual increase in delivery services and production charges of approximately $5.1 million, and this compares to the $5.7 million which was included in the all-party settlements.
Due to the commission’s modification of the settlement, any of the parties may elect to withdraw and request a new hearing, and we and other parties will evaluate the impact of these modifications upon our receipt of a final order, which we expect certainly in August of 2017, over the next few days or weeks. And with that, I will turn over to Brian, to begin the summary of our financial results.
Brian Bird
Thanks, Bob. For the second quarter, net income as Bob pointed out, $21.8 million, or $13.8 million worse than the prior year period, or $0.44 on a diluted earnings per share, $0.29 worse than the prior year period.
Nearly a 40% decrease on a year-over-year basis. And indeed that’s a disappointing quarter when you look at it on a year-over-year basis.
Nonetheless, overall results are relatively in line with our plan for 2017. Moving forward to gross margin for the second quarter.
In the top of page, you see electric is down $12.4 million or 7%. I think people are well aware and looking at the results here, some of that is certainly associated with 2016 results, recovery of the lost revenue adjustment mechanism that we recorded, that makes a big impact on that particular item.
Natural gas was actually up $0.9 million or 2.6%. That is associated with improvement in natural gas retail volumes.
As you look at the decrease in gross margin due to those items impacting net income, it was down $15.1 million when you consider the 2016 lost revenue adjustment mechanism item, and also the adjustment that was in the second quarter of 2016 for the MPSC disallowance. Those two items together total $15 million, that equates to the – almost the full change in gross margin impacting net income.
Other items, we did see an improvement in natural gas retail volumes, offset by electric retail volumes making up the difference. Other items that did impact gross margin without impacting net income.
We did see an improvement in property tax trackers, $3.2 million. So net-net, $11.5 million decrease in consolidated gross margin.
Moving forward, as we look at weather, we did have colder weather in the second quarter of 2017 versus the second quarter of 2016, which resulted in $3.7 million better results as a result of weather. However, 2017’s results versus historic average were certainly worse.
You can see, it’s quite a bit warmer, and we believe that the impact is – was a $2 million worse than normal. Moving forward to operating expenses for the second quarter, for total operating expenses, up $8.5 million or 5.8%.
Of that, the operating and general, administrative expenses were up $2.6 million or 3.6%. As we itemize each of those, you can see none of which are certainly greater than $1 million.
The most prominent one there is a $0.9 million increase in labor, and that’s primarily driven by more expense work than capital during any particular quarter. One of the big increases in our operating expenses is, more than half of the total were property taxes, up 12.2% for the quarter.
I would tell you that, on a year-to-date basis, we’re at $8.8 million in property taxes. Our expectation is progressively settling on property taxes with a partner revenue, that our full year increase will be $10 million.
So in the second half of the year, we’ll see certainly less property taxes, the increase, if you will, in the second half year than we did in the first. Moving forward, in terms of depreciation and depletion, up $1.6 million or 4%.
Moving forward, our operating income, down $20 million on a year-over-year basis. We did see, below that, interest expense was $3 million, favorable on a year-over-year basis, primarily as a result of – we did have interest associated with the 2016 MPSC disallowance that needed to be paid.
We didn’t see that in 2017. That’s the primary driver for the variance, and we also received some benefit from a debt refinancing that took place in the third quarter of 2016.
We also saw improvement in other income primarily due to higher capitalization of AFUDC and also a $0.4 million increase in deferred shares held in trust for non-employee directors deferred comp. Lastly on this page, just to talk about income taxes.
Income taxes on a year-over-year basis were down $2.3 million or 79% primarily due to lower pretax income slightly offset by lower permanent or flow through adjustments. From a balance sheet perspective, other than seasonal movements, the increases in PP&E and shareholder equity, I would just say that the good news there is from a debt-to-equity – debt-to-capitalization standpoint, excuse me, we will come back in within the 55% target at 54.8% as of June 30, 2017.
Now moving forward to the cash flow statement. On the cash flow statement, recent cash provided by operating activity was up dramatically.
It’s primarily due to the fact that last year we provided a $30.8 million refund to customers associated with the DGGS FERC ruling. Certainly didn’t have that in 2017.
Not having to do that in 2017 allowed us to have fewer short-term borrowings during the year. On the income tax reconciliation, we had lower pretax earnings.
Primarily the biggest driver for reduction in income tax expense. And though we did have, on a dollar amount, lower flow-through repairs, deduction and production tax credits on a year-to-date basis and expected for a full year basis, we should see repairs, deduction and production tax credits, very much in line with the prior year.
And again, targeting our 7% to 10% – excuse me, 7% to 11% tax rate for 2017. Moving to adjusted earnings for the second quarter of 2017 versus 2016.
The only driver that we had in terms of impacting GAAP to non-GAAP, you can see that on the left of the page moving towards the center, for 2017 during the quarter was a $2 million of unfavorable weather or $0.03, moving us from $0.44 to $0.47 per fully diluted share. That compared to the prior year, we had a GAAP earnings of $0.73, as you move to the left towards the center.
We had adjustments for unfavorable weather in the 2016. We also added back the two things that I talked about earlier.
We had the LRAM item, the $14. 2 million and the $0.8 million adjustment for the disallowance.
Those two items together were minus $0.15 adjustment. Taking $0.07 adjustment and the other two adjustments, that net $0.15 reduction, adds to $0.65.
So again $0.65 in 2016 versus $0.47 in 2017 or a $0.18 decrease or 27%. If I move from kind of gross margin, taking out those adjustments you saw, a bit flat, and you could argue the – what we saw in retail volumes on the gas side offset by electric, pretty much in line with that thought there.
Unfortunately, the second quarter is our shoulder quarter, and we rarely see strong gross margin in the second quarter. But on the expense side of our business, we continue to extend effectively the same level of expenses to a great degree.
And so those expenses go – went up about $8.1 million. So operating income of $8.3 million or approximately 15% on a year-over-year basis.
As I look forward, that translates all the way down to net income of about $8.7 million or 27%. Moving forward to year-to-date summary results for June 30, 2017.
From a net income perspective, year-to-date $78.4 million or a $3 million improvement over the prior year period. Diluted earnings per share basis $1.61, which would be a $0.06 in improvement on a year-over-year basis.
Moving to weather on a year-to-date standpoint. You can see 2017 compared with 2016, quite a bit colder on a year-over-year basis.
We saw, particularly in January, a very cold January. That certainly drove the primary driver for the $14 million favorable, if you will, on a year-over-year basis from a weather perspective and – but versus historic, again, somewhat of a mixed bag.
But primarily driven by Montana and – pretty much our whole system warmer than historical averages. So $1.2 million in the favorable there.
If we look at non-GAAP adjusted earnings at – what I had show there from a – on a year-to-date basis, 2017 versus 2016, $1.61 only $0.01 adjustment for favorable weather, gets us to $1.60. Compared to the prior year we had $1.55 of GAAP in the adjustments, I talked about earlier on a year-to-date basis, move this over to $0.69.
So $0.09 off on a year-to-date basis or off about 5%. Again, looking from a gross margin perspective after those adjustments, we did see about 2.2% increase adjusting out weather from a margin basis on a year-to-date.
But expenses did increase 5.7% or $17.2 million, thus giving us operating income on an adjusted basis of about $7.4 million. Though there were some favorable benefits in the interest expense, other income and income tax, net income was still off $4.5 million or approximately 5% on a year-over-year basis.
So moving forward to maintaining our full year non-GAAP guidance. Obviously, we’re a bit behind on a year-to-date basis, 2017 versus 2016, and obvious question is, "Why do you maintaining your guidance for the full year – for 2017?”
And this page displays the fact that we showed $1.60 on an adjusted basis for the first half of the year in order to get to our $3.30 to $3.50. At a full year EPS, we’re going to need $1.70 to $1.90 in the second half of the year versus $1.61 that we accomplished for those two quarters combined in 2016.
I believe and the reason we’re going to get there, we will see a margin improvement, more commensurate with what we saw in the first quarter. Again, the second quarter is a shoulder period for us.
Timing of expenses and cost controls that have been implemented based upon results that we’ve seen on a year-to-date basis. I did mention earlier in the call, timing of the property tax expense.
And now that we’ve that matter addressed in 2017, we’ll see some benefit in the second half from that regard. Taking those three things into consideration, we feel comfortable with our guidance of again $3.30 to $3.50 on a full year basis.
Speaking to that point, and one thing I mentioned in the past, we continue to speak to this on a going-forward basis as long as we continue to see headwinds from a regulatory standpoint, we are anticipating to be at the lower end of our 7% to 10% long-term earnings guidance range – I should say total shareholder return range. And with that, I’ll turn it back over to Bob.
Bob Rowe
Thank you, Brian. I’ll start with some quick update on the Montana natural gas case and I know you’re familiar with this.
Upper left, you will see a depiction of the substantial increase in investments we’ve made in the basic natural gas transmission, distribution and storage system and then add to that the overall investment in gas production as well. On the upper right, the depiction of our original filing that was built-up and then ultimately flows through to the final outcome, as we understand it at this time.
Table at the lower right depicts the changes in the proposal through several rounds of stipulation, say, the revenue requirements portion of this case. It was deducted extremely well by our people and it was a good example being able to work constructively with the other parties.
As you know, we initially reached a stipulation with the Montana Consumer Council and then made some additional modifications to the proposal to reach a global settlement with both the Consumer Council and the large customer group. The sticking point was treatment of A&G expenses between DDNS on the one hand and gas production on the other.
Ultimately, the final stipulation was presented to the commission. They acted voted on July 20.
First they removed the A&G concession, essentially going back to the original proposal. But then on the other hand, they made an adjustment, essentially, to timing of the depletion in the gas production assets.
Coming out of that then we would see an increase of $5.1 million. So preserving the core terms of the stipulation with those two modifications.
As I mentioned, we do expect to see a written order relatively soon. Obviously, we’ve been in communication with the other parties and we will be evaluating the stipulation.
We will be evaluating the order as soon as we have received it and do feel that the first part of the case has been handled well. What’s significant, the table on the graph on the lower left side compares our natural gas bills to the typical national average.
And even as we have invested most in the transmission, distribution and storage facilities and in production to help provide our customers long-term resource adequacy and stability, we’ve also managed to deliver, bill substantially below the national average. The second part of the case, the cost allocation and rate design is now underway and should be in process over much of the rest of this year.
Turning then to implementation of Montana House Bill 193. And this, of course, was a legislation that repealed the statutory property tax tracker.
And there the commission’s advocacy to the legislature was essentially that they would like to be able to treat us as they currently treat Montana-Dakota utilities. There’s been a tremendous amount of activity, a number that notices of commission action filings by us.
The key thing here is that we have worked extremely hard to be constructive, to listen to what the Commission was saying in its notices and to make proposals while file pleading that were responsive. So in the Commission’s key NCA, they’ve laid out three possible alternatives in terms of what they are going forward, electric supply tracker would look like.
We then made a filing adopting one of those proposals, which essentially would involve continuing to recover our fixed cost without any need to update those fixed cost and then to tract our variable costs such as fuel, purchased power and with the sharing mechanism to adjust the revenue earn with respect to those costs. The three alternatives in the Commission’s notice are depicted on the upper left side of Page 20, upper right side is the procedural time line, again with us filing a tariff provision on July 14.
And then filing what we thought were very constructive comments on July 21. And then this Friday, there will be an oral presentation and argument in which we will participate and we would expect Commission action shortly after that.
Bottom of the page depicts the elements of what we are calling our PCCAM, Power Cost and Credit Adjustment Mechanism, categorizing the costs into several buckets and then proposing a mechanism for cost-sharing. We did pay attention to the Commission’s – the language, the alternatives in the Commission’s notices to the Commission’s testimony in front of legislature and did look at other mechanisms in the industry.
And then particularly again at the mechanism that Montana-Dakota Utilities uses in the State of Montana. Other regulatory items, on Page 21, and these are updates on items that many of you are following.
Firstly, FERC decision concerning Dave Gates Generating Station . As you know, we did issue a significant refund pursuant to the FERC order and filed petition for judicial review in the District of Columbia Court of Appeals.
That matter is fully briefed. Courts proceed on their own schedules and we don’t expect the decision there until at least the fourth quarter of this year at the earliest.
Concerning Colstrip, as you know, in May 2016, the Commission – Montana Commission issued an order disallowing recovery of certain costs and supply tracker. Those costs were associated for replacement power during an outage in 2013.
In September 2016, we filed an appeal in District Court in Yellowstone County. Briefing there was completed just this May.
And I mentioned in the context of the federal courts, the state courts will also proceed on their own schedule. But certainly on a deliberate basis.
And we believe we should receive an order there within the next 12 months. Third item under the update heading going back to the hydro compliance filing which we worked through last year.
And language there instructed us to indicate our intentions, whether and when to file electric rate case in Montana with a 2016 tester. So in April of this year, we filed our Annual Report with the Montana Commission regarding results for 2016.
And that’s referred to as Scheduled 2017 report. That indicated that we’re in less than authorized ROE 9.38% normalized versus 10.5% weighted average authorized.
At the same time, we also laid out what we thought was a very constructive approach speaking to the Commission’s interest in plans to file a general rate case. At that time indicated that we don’t expect to file an electric rate case in 2017 based on our 2016 test year.
However, we do expect to file the general rate case in 2018, based on our 2017 test year. And as we note that the Commission could require additional filing and we facilitate their assessment of just and reasonable rates.
And that is a subject lying before the Commission. Brian mentioned property taxes, in June the Commission adopted new rules establishing minimum filing requirements for recovery – for partial recovery of property taxes that we pay in Montana.
The Montana property tax tracker allows for 60% recovery of the change in state and local taxes and fees and then this ultimately brought back to level in general rate cases. Over the last five years, shareholders have essentially been responsible for $30 million of uncovered Montana property taxes.
So again we have for all respect – from all perspective, customer perspective and a shareholder perspective, strong incentive to manage our property tax responsibility and we do that mindful this is, one, this is one of our largest expenses and it’s important for us to control it. The Commission’s new rule is based on a fairly narrow interpretation of the enabling statute and certainly just does suggest that the Commission will look closely at the allocation of those costs to customers.
And as we highlight, we do acknowledge that we may face obstacles to the same recovery that we now achieve. Most recently, the Montana Commission has issued number of decisions concerning PURPA qualifying facilities.
And just on July 21, the Commission issued a final order and what is known as QF 1 docket. And there the commission adopted generally lower rates but also shortened the maximum contract length for new QFs to 10 years.
And that 10 years in fact would be with a rate adjustment after the first five years. And the Commission also ordered that any future resources acquired by NorthWestern would be subject to the same period.
And the Commission said it will not initially authorize NorthWestern rate revenue for more than 10 years. And at the end of the 10-year period, the Commission may provide for subsequent rate revenue based on the consideration of the value of the asset to customers and not necessarily based on the costs of the resource.
So this would be potentially a profound change in the way resources owned by the utility and dedicated to sort of that utility’s customer would be treated. This is notable to us because we do have significant generation capacity deficits and have a negative reserve margins.
This is in the context of Western power market that even assuming everything that is planned to be built, will still be 400 megawatts deficit in just a few years. This is a real concern to us and a real risk to which our customers are exposed.
In addition to our responsibility to meet peak demand, national reliability standards that are now in effect, the RBC regime, we are required to have a greater dispatchable resource capacity to meet those requirements than to accommodate intermittent resources that are coming onto our system. We did have a request for proposal out, and we are receiving responses under that.
The RFP was targeted for flexible capacity resources. It was a problem to pick.
It was misidentified sometimes in the press and then comments as a RFP for gas resources. It was not – It was an RFP for any resources designed to meet our needs, our customer needs for flexible capacity.
It suspended that solicitation process based on the Commission’s language and will be evaluating next steps. That’s a great introduction to the capital spending forecast.
On Page 23, you see that we do have substantial capital needs across the company to serve our customers. We talked before about working to level out our capital year-over-year and have done that successfully.
And the capital really is spread across our jurisdictions across electric and gas and across the various components. But about $100 million of this capital spend is earmarked for Montana generation capacity to meet the needs that our supply team has identified to serve our Montana customers.
And so under that, that investment could be subject to the recent 10-year limitation announced by the Commission. We do anticipate funding the investments that we’ve identified with the combination of cash flows, aided by NOLs that are currently anticipated to be available into 2021, along with long-term debt.
However, if future regulatory actions cause additional downward pressure on the credit ratings or if other new investment opportunities arise that are not reflected in the capital forecast, new equity funding should be necessary. And with that, I will turn the call over to you and do questions.
Operator
[Operator Instructions] At this time, we’ll go to Mike Weinstein with Credit Suisse. Please go ahead.
Mike Weinstein
Hi guys.
Bob Rowe
Hey Michael.
Mike Weinstein
Thanks for the [indiscernible] (37:46) update.
Bob Rowe
Yes.
Mike Weinstein
I wanted to ask first about the thought process on the MCA. And what level of information do you expect to have file in September or when they finally do come up.
I guess, after the oral arguments made or done, and they give you an order. What kind of information, what level of information do you expect to have to file in September?
And then what – is there an outcome here that might trigger a decision to file a full rate case earlier than 2018?
Bob Rowe
The best answer is, we don’t know what ultimately the Commission will require. We have filed [indiscernible] (38:27) very specific and constructive proposal for the peak, and we’ll be talking about that with the Commission on Friday.
And we will suggest that the Commission’s focus should initially be on processing that application. They – and we both have limited resources.
It’s – I think it’s a good constructive proposal. Parties can look at that and we could go from there.
As part of our most recent filing and again, as you know, we had initially laid out a path towards a complete general electric rate case to be filed in September of 2018. And that would have included all of the preliminary work, various studies.
It would have included primary requirement, cost of service and rate design. In anticipation of the meeting on Friday and, again, taking into account, Commission comments trying to be constructive, we still think that’s the best approach.
As an alternative, if the Commission is concerned to move more quickly, we suggested filing a revenue requirements only case in spring, in May of 2018, based on 2018 test year. And then we would follow that up with allocated cost of service and rate design.
We think that’s an inferior proposal, but again, we’re really trying to be as responsive to the Commission as possible.
Brian Bird
In 2017 cash journey, we meant to say, Bob, doing that in May and filing everything else in September.
Mike Weinstein
Right. So that – I mean, is there any chance of filing this year, if it looks like they’re trying to bifurcate out the supply side of the company and through the power cost tracker?
Bob Rowe
I think we just need to wait to see what the Commission does in response to our filing. I think it would be premature to guess what they might do.
And again, it’s important for us to be as responsive to the Commission as we possibly can be to respect their process. We’ve tried to do that.
And in fact, in the filings we’ve made, so far, in this context, I think the Commission has acknowledged many of our suggestions and has considered them helpful. So I would say, let’s wait and see what the Commission does after Friday.
Mike Weinstein
And then also on the 7% to 10% sort of return target, you’ve said now, I think, several times that over the near term, you expect to be on the lower end. Is there – at what point – when does the near term end?
Like, at what point, do you think there might be, I guess, an improvement there?
Brian Bird
It’s a great question, Mike. Well, I have to tell you in the light of the QF news and how that could impact us in the going-forward basis, that near term might be longer-term.
It depends on in terms of how that all shakes out in our investment plans on a going-forward basis. But I would argue over the next one to three years, that’s probably where we will be unless we see significant changes and more supportive regulatory environment for its utility.
Mike Weinstein
Okay. And one last question.
There’s additional language in there about downward pressure on credit ratings in terms of the possibility for new equity issuances. Can you talk about what metrics are you specifically looking at?
Is this an FFO to debt metric that looks like it’s borderline? Or could be just a downward?
Where do you stand on those metrics now?
Brian Bird
Thanks, Mike. And in fairness, I wasn’t surprised you might pick up on that.
I think FFO debt is the thing we’re looking at. You saw in Moody’s report.
Certainly, they’re focused on the numbers now. When you strip away a favorable regulatory environment, which was the environment that we used to operate in, we were able to carry a little less favorable coverage ratios, really to the benefit of customers, able to carry a bit more leverage.
But with an unfavorable regulatory environment, the focus has been on those numbers and continued poor outcomes in front of the Commission has put even more heightened emphasis on those. And we have to, if in fact this continues, you see the words future, we may have to raise equity in order to improve our FFO to debt, which ultimately, as you know, will be impact not only investors but longer-term would impact customers.
Bob Rowe
Just a friendly comment there to – even in the natural gas case, we did discuss with the Commissioners, how our ability, because of positive environment to lean a little bit more on debt, was providing real benefits to customers, both in terms of capital structure and in terms of being able to access debt longer-term at lower rates.
Mike Weinstein
Right. I mean, is this a situation of where you have a difference of maybe 1% or 2%?
I mean, for the debt metric that you’re concerned about? What kind of – what level of equity might be needed to adjust that, if I can know?
Brian Bird
Yes, again, I think the best answer for that, Michael, is it depends of the future regulatory outcomes here. I think if you read the Moody’s report, they’re focused on a FFO debt that would go below a 15% on a going-forward basis if there’s continued impact on our earnings and cash flow, that certainly could be jeopardized.
And if we’re not moving up certainly within that over time, that’s going to be something they’ll stay focused on. So, obviously, you yourself has put out sell-side to pieces on the concerns, on the regulatory environment in Montana.
Others have. Just because the rating agencies don’t write about it every day, they’re certainly watching it every day.
And obviously, we – they are just making decisions based upon coverage ratios. 50% of their rating at Moody’s, as you know, is based upon the regulatory environments that we operate in.
So it’s not just solely an FFO to debt. If I’m hearing concerns about our ratings, and we want to maintain our ratings to the best interest of our customers, we’re going to protect those.
Mike Weinstein
Got you. All right, thank you very much.
Brian Bird
Thank you.
Operator
We’ll now move to Chris Ellinghaus with Williams Capital.
Chris Ellinghaus
Hey, guys, sorry.
Brian Bird
Great, Chris.
Chris Ellinghaus
Vis-a-vis the quote in the Page 22 slide relative to the QF sort of new standard at the Commission, have you had much discussion with anyone, staff or Commissioners, regarding the new policy?
Bob Rowe
Since this has been a live docket, we have – we are talking directly to the Commissioners. We’re very sensitive to ex-parte.
We have concerns about how the standard is applied to a utility arose in a docket concerning QF. There’s a question of notice parties on and on.
We need to look at that more closely. And I’ve already spoke to the fact that QF resources and utility-owned resources are not comparable for a whole series of reasons.
I should say something on the QF side. The qualifying one was about, first of all, the Commission and we, all, are committed to following the law and, within that, to trying to manage our responsibilities in a way that makes the most sense for customers through obligations play out differently in the Western market.
And the Commission, I think, was looking appropriately at some basic issues in terms of duration of contract and the appropriate weighted cost and was really paying attention to the advocacy of the Consumer Council as to that. So they were, in the kind of side to it, trying to make some decisions that were sensible for customers.
Beyond that though, the question of how utility resources should be treated was not, in any kind of robust way, in front of the Commission. And we do have to revisit that issue.
And, again, the weighted cost assessment that is applied is something that applies equally to us and to any other resource. When we go forward with the resource, it’s true process that looks at our customers’ specific needs and then looks at the best long-term lease cost, lease risk way to meet those needs, whether it’s a resource we own, whether it’s a resource a third-party owns.
And that’s the difference between the QF process and the process that we would normally use, again, targeted on meeting our customers’ needs.
Chris Ellinghaus
And so subsequent to the docket, now you make an effort to explain to the Commission and staff how this adversely affects both the cost of equity and debt? And can you also sort of just, given what the dynamic is on the 10 years, would you anticipate building under those kind of rules?
Bob Rowe
Well, first of all, the next step isn’t a conversation with the Commissioners. Now we’re in the period for reconsideration, and we expect that we would file a request for reconsideration.
And from our portfolio perspective, we’ve been talking about this. Our customers’ identified need is for capacity resources.
And the key difference between the resources that typically come in as QFs and resources would come in through an RFP is the capacity value.
Chris Ellinghaus
Okay. Brian, you were talking about how property taxes sort of are less of a headwind in the second half of the year.
I think you also are mentioning that you expected sort of flat repairs and tax credits for the year. So that suggests maybe some leveling off of the amount in the second half of the year.
Are those the primary sort of issues that you’re thinking about in terms of timing?
Brian Bird
And those are some of the timings, but there are – we are – we certainly see our results on a full year basis. We’re in a much like we were last year, we’re focused on reducing our O&M cost, our A&G cost in the second half of the year.
We’re certainly tightening our belts, again, in order to meet what we’ve promised investors we’d deliver.
Chris Ellinghaus
Okay, thanks a lot guys.
Operator
Next question will be from Brian Russo with Ladenburg Thalmann. Please go ahead.
Brian Russo
Hi, good afternoon.
Bob Rowe
Hi, Brian.
Brian Russo
Just the $100 million of Montana generation to CapEx that could be subject to that 10-year contract limitation. What years did that fall in, based on Slide 23?
Brian Bird
Yes, I would – the – it’s the latter – it’s the three latter years of the five-year plan. And it gets rolled in, but it’s the back half of those five-year time period.
Brian Russo
Okay, got it. And then also you didn’t mention gas reserve acquisitions.
And I read the Commission’s press release following their order to modify the natural gas rate case settlement, and they mentioned several times how the gas reserve acquisitions are now above market and that customers are paying more for gas than they would if they just bought it on the open market. And I’m just wondering, does that have any influence on your – any future decisions to pursue incremental gas reserve acquisitions?
Bob Rowe
I’d say a couple of things and then ask Brian to add as well. First of all, each of the acquisitions we’ve made has been pursuant to like an analysis agreed to its Consumer Council.
The Commission had previously reviewed those acquisitions, and I recall, at the time, the German saying that the acquisition was good news for customers. And if there was bad news, it was that we weren’t able to acquire more.
But like any transaction, you’re making the decision based on the information you have at that point of time. The gas acquisitions are, first of all, to provide some price stability in the context of the overall portfolio and they do that.
But also to address resource adequacy concerns on the Montana system. And there are constraints on that system.
So both purposes continue to be important. And then the third piece that’s relevant now is that, there – given where prices are, given the prices at which we would transact, there is substantially more upside risk, risk of prices going up than risk of prices going down.
So I think for all those reasons, the gas acquisition program has made sense. Brian?
Brian Bird
I’d add, I think, in fairness, working with the Montana Consumer Council, there’s been a difficult bar set in order to enter into these transactions. We’ve been able to clear that bar and working with them.
And again, jointly effectively bringing forward projects for approval. Ultimately, if we could transact today at these prices and clear the hurdles that have been put forth, it would be a fantastic thing for customers.
It would reduce the average price to customers on a long-term basis. And in light of the treatment of the program in terms of the most recent gas cases, gives you a bit of pause as well.
But nonetheless we’re continuing to look for opportunities because longer-term we think these are the best interest of our customers.
Bob Rowe
And as we highlighted in the one page on the gas rate case, we still managed – we managed to deliver customer bills meaningfully below the national average, and that’s a very good thing.
Brian Russo
Got it. Okay.
And then just – I want to understand better how the current property tax tracker works. So you highlighted a $4.3 million increase in property tax expense this quarter, year-over-year.
So is that the total increase and 60% flows through the tracker and then 40% gets – 40% of $4.3 million gets absorbed by NorthWestern? Is that the way to look at it?
Brian Bird
Yes, Brian. You’re right, and the back half you’re talking how the tracker works, you’re right.
That’s how the tracker works. It now also deals a means of a volume metric to measure in terms of how it’s shown up in customers’ bill.
But you’ve nailed in terms of how the tracker works. The thing, I would say, the reason I mentioned the back half of the year is going to be a bit better on property taxes is on a year-to-date basis, we’ve shown $8.8 million of expense.
We’ve settled our taxes, and our tax bill will go up $10 million for the full year. And so in the back half of this year, we’ll only have a slight increase in property taxes.
So on a relative basis, it will be in a smaller increase. I grant you that our recovery to the tracker will not increase the same level to, but net-net, it will be a net benefit to us in the back half of the year, if that makes sense.
Brian Russo
Yes, it does. And then lastly, in the slide on the property tax are – property tax scrutiny by the Commission that you might face obstacles in recovery.
I mean why – why would you have obstacles in recovery? Because the Commission could just flat-out deny a well-documented tax property bill?
Bob Rowe
The core issue is how much documentation is required. And we understand that we will have to be rigorous in what we provide.
It seems to be underlying issue concerning property taxes associated with property that is not yet in rate base. How that plays out has to be determined.
But the tax is an ad valorem tax, and the tracker is designed to allow us to recover the sum total or 60% of that total.
Brian Bird
And legislation was passed for that tracker for us to do that indeed.
Bob Rowe
And as I’ve said before when discussing property taxes, we acknowledge and agree with the Commission’s concern about the level of utility taxes in Montana. Montana leans very, very heavily on the taxes that we pay.
And those taxes make up a much larger portion of our Montana customers’ bills than is true in Nebraska or South Dakota.
Brian Russo
Got it, thank you.
Bob Rowe
Thanks, Brian.
Brian Russo
Actually, one more thing on it, as an information item, there will be an interim legislative committee looking at utility taxes, essentially excise taxes, and we think that’s positive.
Operator
And at this time we’ll take a question from Paul Patterson with Glenrock Associates.
Paul Patterson
Good afternoon.
Bob Rowe
Hey Paul.
Brian Bird
Good afternoon, Paul.
Paul Patterson
Couple of things. Just could you remind me what the credit-rating goal that you guys have at the parent utility?
Brian Bird
We’d like to be kind of in the mid BBB on secured credit-rating. And our concern here is we’re certainly higher than that in some regards but at S&P, that’s where we sit.
And things we get to BBB minus from a financing perspective, I think it's get to be a bit more costly and obviously you’re one step away from non-investment-grade if you’re a BBB minus. So we’d like to stay right where we have, we think it’s the appropriate spot from a financing cost from a customer perspective.
Paul Patterson
Okay. I’ve also wondering if you’ve heard anything regarding the reaction to the Montana Sun statements that they’re not probably going to go forward with their project given with the conditions of the 10-year and the price that was given to them.
And also this weather apparently from the energy and telecommunications interim committee. Regarding to this approach on contracts and what have you, I was just wondering if you could comment on that a little bit?
Bob Rowe
I don’t think it’s our position to speak on behalf of another entity at all in terms of what legislatures are doing. As I understand the letter, it was written by individual members of the committee.
It was not a committee action. They hadn’t deliberated, taken comment.
By coincidence, the committee will be meeting on Monday, and I know this will be an agenda item for them. So we’re looking forward to hearing with all parties have to say there.
Paul Patterson
Okay, then when we set the 7% to 10% return and being at the lower end of it, there are a lot of things going on. I’m wondering whether or not that lower end might be optimistic.
I mean, I’ve been around for a few years in this. I’ve seen situations where utilities have had difficulty in making lower financial targets.
And you guys seem to be facing some significant regulatory challenges. How should we think about that?
Bob Rowe
I think it’s a fair point. I think as you might understand that the industry as a whole, based upon what The Street is showing for them and what they’re communicating, they’re communicating higher total returns than we’re.
One could argue if you want to stay at the low end of our range, if that’s 3.5% dividend yield and 3.5% growth rate, I’ll argue that the industry as a whole is showing higher growth rates than that. And also argue that the industry as a whole is having regulatory challenges as well.
I don’t think we are the sole party have. But I would grant, we have seen some sell-side reports, we might be having one of the tougher times.
I grant you that. So that’s certainly an issue, I think, from our perspective.
And as a management team, we’re going to look at on the expenses we have as a business on a going-forward basis. And we’re concerned about how we’re going to be able to manage those expenses, but we’re going to trying to be more efficient in how we manage that.
We’re also going to try and grow in our other jurisdictions and hopefully see some growth there from an earnings perspective and invest in those states where we are supported. So I understand your concern.
But nonetheless you have a management team who has delivered on what they said. We’ve been able to do in the past and we intend to do the same here going forward.
Paul Patterson
Even if the current regulatory environment pans out sort of the way it seems to be the trajectory in terms of what we’re saying about the contract length and how that might apply to utility investment in generation, what have you. I mean all – if these things go forward as the sort of going forward, you still feel pretty confident that you can meet the lower end of the range, if I understand you correctly?
Brian Bird
I’d like to think that longer-term, any Commission would see the financial health of their utility sale would be – would like to think of ways they could help to balance that role that they have between customers and financial health of utility. So on a longer term basis, I feel much more confident.
Paul Patterson
Got it. But on the near term though, you’re not and you still feel that you can make the lower end of the range, if I understand you correctly?
Brian Bird
And to your point, if you want to stay in a particular year, I’m already showing in a range of this year of 0% to 3% of earnings growth in a particular year. You’re correct, it will be difficult to achieve 7% to 10% returns.
We are talking about our longer-term total shareholder return on a going forward basis.
Paul Patterson
Okay. Well, thank you.
Brian Bird
Thanks, Paul.
Operator
We will now move to Paul Ridzon with KeyBanc.
Paul Ridzon
Good afternoon.
Bob Rowe
Hey, Paul.
Paul Ridzon
I know you’ve been to the next step in QF docket is request for hearing?
Bob Rowe
Yes, for reconsideration.
Paul Ridzon
Reconsideration. And if that doesn’t go well, what are your legal options?
This seems to be kind of fly in the face of hope and it appears to be retroactive ratemaking. And what legal precedence do you have here?
Bob Rowe
I think we are – it would be premature to say what the next steps are. But obviously there is an opportunity for judicial review of any Commission decision.
Again, the Commission in terms of its QF responsibilities, I think was acting in the way that is very mindful of the needs of its customers.
Paul Ridzon
And then obviously last night the headline number was kind of weak. You’ve talked about a lot of mitigations that you have coming in the back half of the year.
Are you comfortable kind of endorsing the upper half or lower half of current guidance?
Brian Bird
That’s a fair question, Paul. You know that the third quarter and fourth quarter are big quarters for us.
We had certainly a hot July. That doesn’t necessarily help when you adjust for weather, when you understand that.
But since it’s such a big quarter, it’s really tough for us to see anything at this point in time. I think as you’ve seen, we’ve done in the past.
We give that indication unless we know for sure things, we’re going to be outside of that range and we are making an adjust for right now. I’d like to wait till after the third quarter to see where we would – we might tighten guidance at that time, we might not.
Bob Rowe
I should maybe provide one clarification. I think you understand this, I’m sure you do.
But just to be particularly clear, the Commission’s decision about utility-owned resources was a forward-looking decision, affecting our planning to meet customer needs in the future. So the result of that, we suspended the RFP.
But that was not a decision concerning existing owned resources.
Paul Ridzon
My comment about retroactive ratemaking was the ability to do a look-back and revalue assets.
Brian Bird
It’s a fair comment, Paul.
Paul Ridzon
And then, Brian, just a clarification. You said property tax will be a benefit in the back half or…
Brian Bird
Yes, less of a headwind. Thank for that.
$8.8 million on a year-to-date basis. $10 million for the total year.
I could have explained that better. Thank you.
Bob Rowe
Sometimes less of a headwind, the breeze in your back.
Paul Ridzon
Yes. And the 1.2 you are going to pick up, is that going to be 60%, how do we think about that against the current process?
Brian Bird
Yes. I think you should think about full year increase of $10 million and recovery of 60% of that.
Does that help?
Paul Ridzon
Got it. Thank you very much.
Brian Bird
Thank you very much. Yes.
Operator
We have one more question in the queue. This will be from Jonathan Reeder with Wells Fargo.
Jonathan Reeder
Hey, good afternoon, Brian and Bob. Most of my questions have been answered.
But I just wondering – excuse me?
Brian Bird
You’re kind of a closer, I guess, you can say in the closing picture.
Jonathan Reeder
I don’t know about that. I think I’m just been for a – the kind that gets the game across the finish line here.
I don’t know about the closer, that’s a little too strong. But now I’m just wondering if the Commission does order you guys to file a supply side electric rate case, would your plan be then to include T&D portion as well?
Or is there any way that the Commission could deny your inclusion of the T&D portion in the filing?
Brian Bird
On that point, Jon, I think what I would say is I think we’ve laid out a fantastic alternative in terms of being able to give them a 17-test year with recent data and make a filing, expedite, faster than we’ve ever done, making a filing in May on a revenue requirements standpoint. We’d like them to evaluate that.
And after they’ve had a chance to evaluate that, maybe we’ll think about answering your question.
Jonathan Reeder
Right. But I mean, all arrows point to them perhaps coming to a different conclusion.
So just wondering, if there is any way that they can preclude you from including the T&D in the filing, if they do kind of force your hand sooner?
Bob Rowe
I think the answer to that narrow question would be, no.
Jonathan Reeder
Okay. And then in terms of the gas – the modified gas rate case settlement, I imagine you’ve had some conversations with the settling parties since at least the verbal decision came out, can you kind of share what their thoughts are on that, the likelihood of any party objecting?
Bob Rowe
No. We really can’t speak for them, and obviously, discussions like that would be considered confidential anyway.
I think all three parties are waiting to see what the order says. Looking forward to seeing that very soon.
Jonathan Reeder
Okay. And from your perspective at least, I mean, if they are willing to stay on, are you guys willing to then?
Can you tell us that at least?
Brian Bird
I think it’s very important that we see the final order.
Jonathan Reeder
Okay. And then last, Brian, I know you’ve said you kind of already implemented some of the cost controls.
I imagine there might be some other things that you want to accomplish in the second half. Can you just kind of let us know, what level of sight or confidence do you have in being able to pull enough levers to at least get to the midpoint of the guidance range?
Brian Bird
I think, from my perspective, we have confidence to reaffirm our guidance.
Jonathan Reeder
Okay. But going to the earlier question, whether it’s lower, upper, midpoint, still too soon?
Brian Bird
You know how I answered that question too, Jonathan. I wasn’t very helpful on that question either.
I’ve provided you a full range of guidance. I’m not guiding you to where in that range we’ll be.
Jonathan Reeder
Right. Okay, good luck getting through the upcoming regulatory events.
Brian Bird
Thank you, and by the way, any – feel free to provide the obvious. We’re hearing investors share their concerns on this call about what’s happening in the Montana regulatory environment.
Feel free to share your concerns with the Commission directly.
Bob Rowe
Are there any other questions on the queue?
Operator
We have no further questions on the queue.
Bob Rowe
So in closing, first of all, thanks for the good discussion and your interest and support. What I would say in closing is there has been a lot of questions, as always the case, about regulatory activity, and particularly, on the Montana side.
What the Commission and we ought to have in common is a focus on doing the best possible job we can for our customers. And that certainly is, like what I mentioned, we were meeting with the employees and operations here in Helena division this morning.
That’s what they get up and do every day of the week, and they’re passionate about it, and I mean every day of the week, seven days a week. And that’s for where we need to be focused as well.
And that ultimately is the Commission’s responsibility, and it should be something that we share very deeply. And I believe that the Commission, collectively and individually, does.
We can’t do that without your support. We just can’t.
And we appreciate the support that you’ve provided over the years. And I think as we’ve seen in the discussion about capital structure, credit ratings, that is important.
And it materially affects our ability to make the investments we need for our customers, and it affects how costly or affordable those investments are. So we appreciate your interest.
And that’s why we are working as hard as we are to be transparent to you, but also to be as constructive as we possibly can be with the Montana Commission and find ways to respond to their concerns and move forward in the best way we can for our customers. So again, thanks for your interest and support for the company.
And I’ll see many of you in person and hopefully, talk to all of you next quarter.
Brian Bird
Thank you.
Operator
And again, that does conclude today’s conference call. Thank you all for your participation.