Nov 5, 2017
Executives
Travis Meyer - Director of Corporate Finance and Investor Relations Officer Robert Rowe - President and Chief Executive Officer Brian Bird - Vice President and Chief Financial Officer
Analysts
Michael Weinstein - Credit Suisse AG Nicholas Campanella - Bank of America Merrill Lynch Paul Ridzon - KeyBanc Capital Markets Inc. Christopher Ellinghaus - The Williams Capital Group, L.P.
Douglas Christopher - Crowell, Weedon & Co. Jonathan Reeder - Wells Fargo Securities, LLC
Operator
Good day, everyone, and welcome to the NorthWestern Corporation Third Quarter 2017 Financial Results Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to you Investor Relations Officer, Mr. Travis Meyer.
Travis Meyer
Thank you, Tony. Good afternoon, and thank you for joining NorthWestern Corporation's Financial Results Conference Call and Webcast for the quarter ended September 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 premarket this morning.
On the call with us today are Bob Rowe, President and Chief Executive Officer; Brian Bird, Vice President and Chief Financial Officer. In addition, we also have a few other members of the management team with us in the room to address your questions today if needed.
Before I turn the call over for us to begin, please note that the company's press release, this presentation, comments by presenters and responses to your questions may contain forward-looking statements. As such, I will remind you of our safe harbor language.
During the course of this presentation, there will be forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often address our expected future business and financial performance and will often contain words such as expects, anticipates, intends, plans, believes, seeks or will.
The information in this presentation is based upon our current expectations. Our actual future business and financial performance may differ materially and adversely from our expectations expressed in any forward-looking statements.
We undertake no obligation to revise or publicly update our forward-looking statements or this presentation for any reason. Although our expectations and beliefs are based on reasonable assumptions, actual results may differ materially.
The factors that may affect our results are listed in certain of our press releases and disclosed in the company's Form 10-K and 10-Q along with other public filings with the SEC. Following our presentation, we'll open the phone lines to allow those dialed into the teleconference to ask questions.
The archived replay of today's webcast will be available beginning at 6:00 p.m. Eastern today and can be found on our website, again, northwesternenergy.com, under the Our Company, Investor Relations, Presentations and Webcasts link.
To access the audio replay of the call, dial 888-203-1112 then access code 8578548, again that's access code 8578548. I'll now hand the presentation over to our CEO, Bob Rowe.
Robert Rowe
Thank you. Good afternoon.
We know this is a very busy week for all of you and we greatly appreciate you joining us. We just completed our board meeting in Yankton, South Dakota, which is a beautiful and growing community along the banks of the Missouri River at the southern border of South Dakota.
As we typically do, we had a great community meeting last night and then a very lively enthusiastic employee meeting this morning. Net income for the third quarter was $36.4 million, or $0.75 per diluted share, as compared with net income of $44.6 million, or $0.92 per diluted share for the same period in 2016.
And this $8.2 million decrease in net income is primarily due to the inclusion, in our 2016 results, of a $15.5 million income tax benefit, which was due to the adoption of a tax accounting method change related to the cost to repair generation assets, that was partially offset by an increase in gross margin driven by favorable weather, and to a lesser extent, by customer growth. Meanwhile, non-GAAP adjusted earnings per share increased $0.06, or 8.8% to $0.74 and that is as compared to $0.68 for the same period in 2016.
And the board did approve a quarterly stock dividend of $0.525 per share, payable December 29. And with that, I'll turn it over to Brian.
Brian Bird
Thanks, Bob. On Page 4, we provide the summary financial results for the third quarter.
As Bob pointed out, net income is $36.4 million for the 3 months ended September 30, 2017 compared to $44.6 million, an $8.2 million decrease on a year-over-year basis. What I'd point out in addition to that, on a pretax standpoint, we got $39.2 million for the quarter versus $34.9 million in the prior-year period, a $4.3 million increase, or 12% increase on a year-over-year basis.
That was driven primarily from nice increase in gross margin of 3.7%, I'll speak about that in a moment; good cost control with only operating expenses going up 1.3%, with operating income up almost 10% on a year-over-year basis. On gross margin for the third quarter, gross margin was up $7.6 million on a year-over-year basis and equally contributions at least on a percentage basis from both electric side of our business, up $6.6 million year-over-year primarily driven by improvements in our electric retail volumes; and up $1 million in our natural gas business primarily driven by improvements in our natural gas rates and in retail volumes.
Moving forward from a weather perspective, the second quarter - excuse me, the third quarter is really focused on cooling degree days, and it was much hotter in Montana than the prior year, 68% warmer and 29% warmer than our historic average. That was partially offset by certainly colder weather in our South Dakota business.
Net-net that improvement contributed a $4 million pretax benefit versus normal - $0.4 million versus normal and a $1.8 million pretax benefit versus the prior year. Moving forward to operating expenses on Page 7.
Our operating expenses increased $2 million, or 1.3% for the quarter. Operating, general administrative expenses were up $1.9 million, or just under 3% primarily driven by higher employee benefit costs.
In the areas of higher medical and insurance costs, we did have lower property taxes $1.6 million on a year-over-year basis. That was driven primarily due to inclusion, in our 2016 results, of approximately $5.4 million increase to our annual property tax expense estimate.
And lastly, we had depreciation and depletion up $1.7 million, or just over 4% primarily due to plant additions. From an operating income perspective, nice improvement.
$61.6 million in total, which is a $5.5 million increase, or nearly 10%. Below operating income, interest expense was up, that was slightly offset by an improvement in other income, giving us an income before taxes amount of $39.2 million, a $4.3 million, or 12% improvement on a year-over-year basis.
I did - should also mention on income taxes. As Bob pointed out earlier in the call, we did have a $12.5 million increase in income taxes, primarily driven by the income tax benefit that we saw in 2016, the $15.5 million that he noted earlier.
Speaking of income taxes on Page 9, we have our income tax reconciliation. You can again see, at the bottom, the change on a year-over-year basis was $12.5 million.
If you look at the flow-through repairs deductions line, you can see that almost all of that increased on a year-over-year basis was the associated year-over-year impact through the flow-through repairs change that we made in 2016. And matter of fact, of that amount, the $15.5 million change, $12.5 million was associated with prior years, related to 2015 and prior years before that.
And as you might notice that is exactly equal to the change on a quarter-over-quarter basis. Moving to balance sheet on Page 10.
Other than seasonal changes you'd see between September and December of 2016, September 2017 versus December 2016, we did show a 3% increase in PP&E, with a 3% increase in equity. From a - our total debt-to-cap did go down to 54.1%, primarily driven by paydown and short-term borrowings and, obviously, the increase in shareholders' equity.
From a cash flow perspective, certainly a significant improvement. From the 9 months 2017 versus the 9 months 2016, that $42 million improvement in cash provided by operating activities is primarily driven by the $38 million in refunds that we did pay in 2016 associated with the DGGS FERC ruling and the South Dakota electric rate case.
Obviously without those, we saw an improvement in cash from operating activities. Those improved cash flows were helped to finance investing activities.
Our CapEx spending was relatively in line with what we did on a prior-year basis. And lastly, excess cash was used to pay down short term debt and, of course, paid for the increase in our dividend.
Moving to our GAAP to non-GAAP calculation on Page 12. You've seen this before.
What we're trying to do is, from the outside of pages towards the insides, compare on a GAAP to non-GAAP basis. Our results at the bottom of the page and as Bob mentioned earlier on the call, we show $0.74 EPS in '17 on a non-GAAP versus a $0.68 for 2016 non-GAAP for the 3 months for the quarter, which is an 8.8% improvement on a year-over-year basis.
That one adjustment that we did after the quarter, where we backed out favorable weather, we talked about being hotter in Montana. Driving that change, we're backing out that percent to get to our $0.74.
As you look down at the center of the page to the components of the P&L, gross margin, a nice increase, 2.8% for the quarter. Nice job in terms of controlling costs, 1.1% increase.
We're getting some nice lift in operating income and pretax income both around 7%. Moving forward to year-to-date results on Page 13 very briefly.
$114.8 million of year-to-date net income, which is $5.2 million worse than the prior period. Same reasons as we just explained earlier in the call, primarily associated with the income tax benefit that we had in 2016.
If you look at income before taxes, $124.8 million, which is a $10.8 million improvement, or nearly 10% improvement on a year-over-year basis year-to-date September. And likewise, in the components, gross margin up nicely 4%; costs up a bit higher than we showed for the quarter, up about 4% with a nice lift in operating income.
We do show on a year-to-date basis, interest expense slightly less associated with the refinancing that we've conducted; and other income, a slight improvement. They're helping us get to our income before tax, which is nearly a 10% improvement, as I noted earlier.
Weather on a year-to-date basis on Page 14. On the right-hand side, you see cooling degree days, obviously it's hotter in Montana and a bit colder in South Dakota, we discussed that already for the quarter.
But at the bottom of the page is heating degree days, primarily in the first quarter, a bit colder. And January certainly helped us to be slightly colder than normal, and a bit warmer than normal for South Dakota.
On a year-to-date basis, were $1.6 million better than normal and $15.8 million better than the prior year, as a result of weather. Non-GAAP adjusted earnings on a year-to-date basis, again at the bottom of the page, adding back a favorable weather, in this case, $0.02 - excuse me, taking out $0.02 of favorable weather brings us $2.35 at EPS versus $2.38 on a year-to-date '16, down $0.03 or just over 1% down for the year.
Looking at the components of the P&L, gross margin up 2.4%. We do show costs being up to higher 4% operating income and pretax down about approximately 2% in both cases.
For a guidance perspective, we did update our 2017 earnings guidance. We tightened the range to $3.30 to $3.45, previously from $3.30 to $3.50.
The reason for that is, as we got through 3 quarters, we typically do is tighten our guidance range to $0.15. And based up on where we sit today, we see an unlikely to reach that top end of our range.
One thing that I'd also want to point out on this particular call, I made the decision in the red box to focus on why we were tightening our guidance, we did remove language regarding the 7% to 10% total return. I would reiterate what we said on prior calls, in light of recent regulatory headwinds, we expect to be on the low end of that range on a going forward basis, in particular as we look at that on our long term total shareholder return profile.
Moving to Page 17, I just mentioned here previously we're slightly behind on a non-GAAP basis through the first 9 months of the year. As we look at the last quarter last year, we had $0.92.
So, in order to achieve our $3.30 to $3.45, our new guidance, we need to get $0.95 to $1.10. The question would be how do we expect to achieve that.
Our expectation on a year-over-year basis, we expect to see margin improvements, or commensurate with what we saw in Q1 with some additional benefits from the Montana gas case. And also, we continue to do - we'll be focused on expenses moving into the fourth quarter and look to flattish type OG&A expenses, which should help us achieve our goals.
Lastly, I want to touch, based on financing activities we announced in September At-The-Market Equity Offering Program, or aka our dribble program, we did initiate that and started selling shares. We actually received approximately $5 million of proceeds in the third quarter.
We will continue to execute on At-The-Market Program and expect to issue the remaining $95 million in shares, if you will, by the end of 2018. One thing we've done to, a great extent, offset the dilution of the ATM program is we did execute on the refinancing in October that was expected to close in early November.
What we've done is, we priced $250 million bonds with just over 4% 30-year First Mortgage Bonds that will be used to redeem existing $250 million of debt at 6.34%. So that's going to help the savings on the refinancing there and the savings from that having to issue debt because of the equity issuance are going to help us offset that dilution from the ATM program.
And with that, I'll hand it over - back over to Bob.
Robert Rowe
Thank you very much, Brian. I will cover off on a few regulatory and legal matters.
To begin with, first, turning to the pending appeal of the Federal Energy Regulatory Commission's decision, essentially cost allocation decisions between our retail and our FERC jurisdictional wholesale customers at the Dave Gates Generating Station. As most of you who've been with us over the last few years know, we did - we received an adverse ruling from FERC after a successful outcome in Montana.
FERC denied our request for rehearing in May of 2016, required us to make refunds, which we did over $27 million in June of that year. We promptly filed a petition for review with the D.C.
Circuit Court of Appeals. And after waiting about a year and a half, I'm pleased to say that we now do have an oral argument scheduled for December 1 of this year.
We obviously can't predict precisely when we might receive a decision, but we are hopeful that we will receive that in the first quarter of 2018. So again, a milestone we and you have been waiting for.
Concerning Colstrip matters in May of 2016, the Montana Commission issued an order disallowing recovery of certain costs particularly including tracker costs related to a 2013 outage in Unit 4. And appeals there have been filed coming out of 2 different proceedings in 2 Montana district courts regarding the disallowance and we expect to receive orders from each of the courts within the next 12 months.
Again, courts run their own schedules. Third item, property tax tracker.
As you know, one of our largest expenses is Montana property taxes. And in recognition of that, the legislature a number of years ago adopted a statute allowing for a recovery 60% of the change in state and local taxes and fees between general rate cases.
In June of this year, the Montana Commission adopted new rules purporting to implement minimum filing requirements under that statute and the rules appear to contemplate a narrower interpretation of the enabling statute and suggest that the commission will look closely at the amount of taxes allocated in recovery from our customers. We expect to make our annual tax tracker filing in December and resolution should occur in the first quarter of 2018.
Next, concerning our Montana natural gas rate filing. In June, we did reach a settlement agreement with interveners and that was in the first part of the docket, which concerned the revenue requirement and also addressed our gas production assets.
In August, the Montana Commission issued a final order accepting the settlement but with modifications. The net result was an annual increase of $5.1 million, with an ROE of 9.55% and an ROR below 7% at 6.96%.
And that did include an annual reduction step down in production rates to reflect depletion between rate cases, which were effective as of September 21. That case was bifurcated, and the balance of the case then will go to hearing in December.
And the issues there are allocation between classes and then also the monthly service charge. The final order in the revenue requirements position reflects an increase of about $5.1 million.
We expect the increase in 2018 to be approximately $1.9 million, that's due to the inclusion in 2017 of 4 months of increased rates plus the step down in gas production reflecting depletion, as I mentioned. Qualifying facilities are always a lively topic in this part of the country and certainly in Montana and, to a much lesser extent, in South Dakota.
As you know, under the Public Utility Regulatory Policy Act, electric utilities are required, with exceptions, to purchase energy and capacity from independent power producers that qualify as QFs, qualifying facilities. In June, the Montana Commission issued an order which was the QF-1 docket that adopted generally lower rates and also shortened the maximum contract length for new QFs to 10 years, with the potential for a rate adjustment after 5 years, a second look at the half-way through.
The commission also ordered that any future resources acquired by utilities would be subject to the same period, saying at the time, it will not initially authorized 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 a consideration of the value of the asset to customers and not necessarily based on the costs of resources. So, this was a pioneering regulatory interpretation.
As would be expected there, we request for reconsideration filed by QF parties as well as by NorthWestern. In October, the Montana Commission voted to retain most aspects of the original order but did revise the order by extending the contract length to 15 years and continuing to apply - but continuing to apply the contract term both to QF resources and to future NorthWestern electric supply resources.
It has not yet issued a final order but based both on the October - based on the October vote, we expect that the decision will result in substantially lower rates for future QF contracts. We are obviously waiting to see the final - before we evaluate it as to any next steps is, those of you who follow the company know, we have significant capacity deficit, we have a 28% negative reserve margins in Montana and our supply plan identified a very real price and reliability risks to our customers if we rely solely on market purchases to meet these needs.
We have responsibilities to meet peak demand and national reliability standards, new standards require us to have even greater dispatchable generation capacity available to increase or decrease output to respond to intermittency sources that are increasingly coming on the system. So again, we will be looking with anticipation for an order from the Montana - with north of Montana Commission and we'll evaluate promptly.
A large amount of regulatory activity has been concerned on implementation of House Bill 193 passed by the Montana legislature. Essentially what that did was repealed the statutory tracker that had allowed us to recover prudently incurred electric supply costs, and the repeal is effective at July 1.
You'll see in the middle of Page 21, a procedural timeline and the commission has been very, very busy with implementation and we have worked hard to be constructive. The first several iterations really were focused on clarifying the scope of the proceeding and developing a path forward.
At this point. The final day for intervener testimony is coming up on November 13.
On January 12, we'll have the opportunity to file the rebuttal testimony, presumably there will be discovery around both those activities and a hearing is currently scheduled to commence on March 12. As you see in the text, we try here to be as responsive to the commission's identified concerns as we could be.
And specifically, in its legislative testimony, the commission urged that NorthWestern should be subject to the exact same regulatory treatment as is Montana Dakota Utilities. And the commission adopted a mechanism that applies to MDU involves a 90%/10% risk sharing mechanism is between customers and the company.
So, we look closely at the MDU model and proposed a PCCAM, power cost adjustment mechanism, depicted in hypothetical at the bottom of the page. And effectively what this does is propose 3 buckets.
The first would be traditional power costs, and then that would have again a 90%/10% sharing of deviation from a baseline. The second category would include QF prices, QF costs, which of course is set under commission order that will be offset against any sales, but also it includes the Public Service Commission and Consumer Council taxes would go to fund those 2 agencies.
And then the third category would include our demand side management program costs and then our administrative and general costs specifically associated by activities. So, we think it's a thorough, thoughtful and a good face response to what the commission had urged.
Notably the commission at one point, we believe, was poised to require something that would look very much like a General Electric rate case. And in their initial notice, the commission had set out 3 alternatives.
The first of which was effectively to work off of a baseline of existing supply costs and that was where we focused. We considered it very positive, that the commission ultimately decided not to require, again, a virtual rate case, given the amount of work that they and we have in front of us with, of the other matters we've been discussing.
So, we do intend to file the General Electric rate case in the 12, 2018, based on a 2017 test year and have all of the really quite challenging preparatory work for that. Scope that that would include both a Montana filing and then a FERC filing for FERC jurisdictional cost recovery.
Final page in the section, our capital spending. As we've discussed about in previous quarters, we have moved out the capital forecast over the 5-year period and this includes a significant essential capital investments in both South Dakota Nebraska Gas or South Dakota Nebraska operations and Montana, and then allocated between the various functions.
Included in that is approximately $100 million of capital associated with the Montana generation capacity and that - the timing and actions around that will be subject to evaluation again depending on the Montana Commission's order coming out of the QF cases. Last thing I would like to say, before we open it up for questions, is I just have a little comment on some of our operational activity over the last few months.
You may be aware that Montana was subject to just an extraordinary fire season. We have lots of assets out in extremely rural and mountainous areas.
And as a result of the need to protect those assets should they be in danger, we did not participate in mutual assistance in response to the hurricanes. As you saw, the industry was just extraordinary in stepping up in Texas and in Florida in particular, and it just - it made all of us proud to be part of this industry.
And I would include those of you who help make it possible. In Montana, ultimately the fires were put out by early heavy snows in September.
And the second wave or so of those storms we experienced an extraordinary snow storm on the highline in Montana, and that's the open Prairie country that goes on for hundreds and hundreds of miles not too far south of the Canadian border. The storm moved from west to east and exposed our - particularly our east, south facilities' transmission and distribution lines to extraordinary ice loading and incredible pressures.
And this was the - not in terms of the number of customers out, it was at most in the 8,000 customer range. But in terms of the scope and complexity of the largest storm we've had to respond to since South Dakota ice storm in 2005, we were able to handle this with internal resources of frontline crews, the engineering, logistics, customer care, and with lots of people in the field talking to customers as well as doing a hard work, it was just an extraordinary storm response.
We've talked to you over the last few years about our infrastructure investments, our technology investments, all of those really came into play in response to the storm. It was just a great example of our people and the communities in that area pulling together.
We are very pleased that just last Monday, the Montana Commission held a community meeting in Havre. It was an opportunity for us to talk in a very systematic way to the commission and staff and particularly to the community about the storm response, most especially it was an opportunity for us to say thank you to those communities for stepping up as our partners, and we heard a tremendous, really a moving round of appreciation back from the community.
So again, thanks for the Montana Commission for holding that meeting. And I could not be more proud of the people that we work with.
So, I apologize for getting a little bit heart on the sleeve there I guess. But with that, we are now open to questions, and thanks for your patience.
Operator
[Operator Instructions] And we will go first to Michael Weinstein with Credit Suisse.
Michael Weinstein
Hey Bob, Brian, how you doing?
Robert Rowe
Hi Michael. Good, thanks.
Michael Weinstein
A question on the rate case filing that you're planning for the fall of next year. Is that going to include - I know it's a 2017 test year, but is that going to include known and measurable changes for 2018 test year as well?
Specifically, I mean would it include expenses from - expense levels from 2018 in the filing when you do make it?
Robert Rowe
We certainly will look at known and measurable changes. The nature of those changes is probably something we would decide much closer to the filing, when we know what they are.
Michael Weinstein
So, you mean it does include kind of a known and measurable change and it will go beyond 2017 is what I'm trying to get at, right?
Robert Rowe
The extent to which it will is far from being decided. Yes, there is a known and measurable change component to the filing.
Michael Weinstein
Okay. And leaving aside other issues for the moment, is a 15-year contract length enough to reinstate the RFP?
Is that enough, on its own, to reinstate the RFP?
Robert Rowe
We really do need to look at that the commission's order when it comes out. And on the one hand, we are extremely concerned to that were identified in the plan, that's what the RFP was designed to do.
My - I'm going to go just a little bit beyond in trying to give you the more fulsome answer. In the first instance, the discussion of the commission was consistency between tripping of QF and utility resources for a number of reasons that really is apples and oranges.
Utility has no obligation to serve. Utility resources do, just like other resources, have to meet and avoid the cost test.
And that test is consistent across resources and we have to compare as we are through the RFP our resources to other resources. A difference between - and a key difference between owned resources and non-owned resources is that resources we own are priced on the basis of cost, not on the basis of market and those resources are depreciated over time.
So, whenever they are brought back in, as part of a rate case for example, the cost to customers reflect that depreciation, that doesn't occur with third-party or QF resources. So how you thread that needle is a significant question.
But in terms of what we would or would not be able to do under a 15-year threshold, it remains to be seen, and we look forward to seeing the commission's order.
Michael Weinstein
And just a final question, what level of generation investment does the forecast for the low end of 7% to 10% total return include in it?
Brian Bird
It's a good question. I think you know our plans were $1.3 billion was the number that was in our resource plan.
Lot of that investment was certainly on the back end. During the periods of time that we were including those assets, if you will, in the rate base, I feel very confident we would be well within that range.
I can't necessarily specifically answer that question on a year-by-year basis between now and the end of that plan. But once we're executing our generation investment, I see - expect to see us well within that range.
Michael Weinstein
So, the - and the low end include some investments not no investment, is that a fair statement?
Brian Bird
I would tell you that our expectation to be on low end is ultimately making some investment, but on the low end.
Michael Weinstein
Okay, I got you. Alright, thank you very much.
Brian Bird
Thank you.
Operator
And we go next to Nicholas Campanella with Bank of America Merrill Lynch.
Nicholas Campanella
Hey, good afternoon.
Brian Bird
Hey Nicholas.
Nicholas Campanella
I was just curious on the equity program. Once that's complete, where would that put you guys on your FFO to debt versus kind of where you want to be and where the rating agencies want you?
Brian Bird
Nick, we'd see ourselves moving up closer to that 18% FFO to debt. I think the focus on that number was lessened when the rating agencies felt that a regulatory environment was more positive.
They've certainly put more focus on those coverage ratios and that would move us closer to that 18%, that's where they'd like us to be.
Nicholas Campanella
Got it, okay. And then just to go back to the resource procurement, do you think it would be possible to acquire generation instead of building your own potentially to address some of the regulatory concerns here?
Robert Rowe
Could you flush out your question a bit more? By acquired, do you mean entering the PPAs, do you mean purchase generation...
Nicholas Campanella
Either a bilateral contract or purchase generation rather than construction?
Brian Bird
I think from our perspective, if the resources are already built and they meet our needs and they are more cost effective than building, we certainly would consider those effects answering your question.
Robert Rowe
Yes. And the RFP was again designed to identify that whole range of options.
The concern we have in the Western market certainly is there are an awful lot of straws potentially in the same drink and we don't know how deep that market is.
Operator
We go next to Paul Ridzon with KeyBanc Capital Markets.
Paul Ridzon
Good afternoon.
Brian Bird
Hey Paul.
Paul Ridzon
Brian, you said 4Q drivers talk about flat SG&A. Is that just for 4Q, is that for the full year?
Brian Bird
I think from - I would argue flattish for the full year. I think when I'm looking at total OG&A and talking about that particular category is certainly going to be tough for the property taxes and those types of things, but from an OG&A perspective, we'd like to think that will be flattish for a full year basis.
Paul Ridzon
And then on the PCCAM retroactive to July 1, do you have a sense of how much that is?
Brian Bird
That is again - Bob talked about the 90%/10% sharing concept. Until an appropriate basis is determined, and we can ultimately see where final numbers come, it's very difficult to understand.
I think the hypothetical that we provided gives a good indication in terms of the range of impact.
Robert Rowe
Really, we haven't even seen our intervener testimony yet, so we don't know the amount of that issue.
Paul Ridzon
And then what level of discussions have you had with the commissioner on the fall '18 DRC filing in Montana?
Robert Rowe
Really no direct discussions at all. We have told them what our plans are.
You've seen, for example, the letter we sent earlier this year and we took it as a positive sign that the - that commission decided not to include that in the PCCAM docket.
Paul Ridzon
Okay, thank you very much.
Robert Rowe
Thank you.
Brian Bird
Thanks Paul.
Operator
[Operator Instructions] Next to Chris Ellinghaus with Williams Capital.
Christopher Ellinghaus
Good morning, guys or good afternoon, sorry.
Robert Rowe
Good morning.
Christopher Ellinghaus
It feels like morning to me. Bob, can you elaborate a little bit more on the fires issue?
And was there any kind of material impact in the quarter?
Robert Rowe
No. And we - we're very vigilant and very concerned.
It was an extraordinary summer for the State of Montana, but no, we did not experience any kind of significant impairment at all.
Brian Bird
Spot on from a fire perspective is what's playing out that the Havre storm that Bob did talk about, there will be expense associated with that, but most of the dollars spent there because we had significant damages really in the capital side of our business. And so again to your early question about our expense control, flattish still comes into the play even taking that into consideration.
Christopher Ellinghaus
Okay. And Bob, as far is the filing goes, at one point, you were talking about a spring or it offered, I guess, a spring filing bumping up the time frame.
Is that off the table at this point?
Robert Rowe
We're focused on a filing in fall of '18, and all of our planning and preparation is going in that direction.
Christopher Ellinghaus
Okay. Would it be fair vis-à-vis your compliance filing earlier in the year to expect at the time of that filing that your ROE should diminish somewhat?
Robert Rowe
No.
Christopher Ellinghaus
Okay. And do you have any idea when you expect the QF order to come out?
Robert Rowe
It should be any day now. We look at the - pardon me, there will be a 30-day extension on completion of the order, but it is again eminent.
Christopher Ellinghaus
Okay. And when you designed your PCCAM, I presume you were looking at Oregon's history when you were designing that concept.
Do you feel like it - your concept avoids some of the significant volatility, let's say, Portland had experienced early on in there sort of earnings in the way that you designed yours?
Robert Rowe
We certainly did look at other models, but we focused on the MDU approach, which has been workable for MDU and that was where the commission seem to be really laser focused at the legislature. And of course, we'll have to see what other parties say in their testimony.
But to the degree that there are deviations from the MDU proposal, one would think that those would be supported by differences between the companies. And we highlighted, for example, treatment of QF but we focused on MDU.
Christopher Ellinghaus
Okay. And has there been any updates recently?
Robert Rowe
Brian will jump in there too, but first...
Brian Bird
One thing I'd just add to that, I mean until the legislation was passed, we didn't evaluate any type of change to our supply tracker. It wasn't until the legislation is passed that we evaluate anything.
And to Bob's point, based upon what we heard from the testimony perspective, we focused on MDU.
Robert Rowe
It is worth reminding to that under the statutory mechanisms for - in the last several years, we have had significant disallowances. So, there was risk associated with the statutory model as well.
Christopher Ellinghaus
Okay. Speaking of the legislature, has there been any other notable movement in the legislative committee since the big hearing a month or 2 ago?
Robert Rowe
The interim committee has a number of meetings going into next year. Some of the areas it's focused on are very tactical.
So, I wouldn't say there's any significant development there.
Christopher Ellinghaus
Do you think that the interim committee hearing day had any impact on the commission?
Robert Rowe
I won't comment on that.
Christopher Ellinghaus
Then I would love to talk to you about that next week.
Brian Bird
I think we won't comment it next week either.
Robert Rowe
No, the commission - we respect to commission, want to work with them whenever we can, and that really is a question for them. I think the important thing is that in the PCCAM docket, they made a decision that we can work with, so that's where we're focused.
Operator
Moving next to Doug Christopher, D.A. Davidson.
Douglas Christopher
Great, thank you very much for taking my question. Just on the updated earnings guidance, I wonder if I heard you correctly, you said you were moving the 5% to 7% outlook, is that what you said, or can you clarify that again, please?
Brian Bird
No, I think what - Doug what we - what was pointed out, sell side pointed out that we didn't have our 7% to 10% long term total shareholder return view on the document, and so I just reiterated what we had said on a previous call associated with that.
Douglas Christopher
And what was that again?
Brian Bird
That we reiterated that we expect to be on the low end of that guidance, in light of the regulatory headwinds we currently face.
Douglas Christopher
And then lastly, just with regard to the sense of the - your relationship with the regulators, you guys seem to be doing all the right things, you're invested - you have the hydro and the renewables a significant portion, you're widely spread out that you're relatively challenging to control your costs. Just wondering are the relationships with the regulators trending positive, neutral, negative?
Robert Rowe
What I can say, from our perspective, we want positive constructive respectful relations with all of our regulators, federal and state. And I think for the most part, we have that in Montana.
The commission's decision so far in the PCCAM docket has been positive. We have concerns.
We are eager to see addressed in the QF related dockets. But again, in terms of QF pricing the commission, we think, took a step forward and we have supported that.
And then lastly, as I mentioned, the commission's public meeting in Havre on Monday was very positive, and that reflects the comments that you're making about the quality of our operations.
Douglas Christopher
Now you're making all the right investments, it would seem that that would be honored by the regulators?
Robert Rowe
We hope so. And obviously the concerns from the credit rating agencies as well as from equity analysts are significant.
We hope those are heard. But the metrics that we hope they're focusing on would include safety of our employees, safety of the public, customer satisfaction, diversity of supply resources and our ability to maintain and invest in the overall system.
This is the most critical infrastructure in an extraordinary part of the country and that's our stewardship responsibility. And to be able to meet that responsibility really does depend on regulatory decisions.
Douglas Christopher
Thanks for talking my call.
Robert Rowe
Thank you.
Operator
Moving next to Jonathan Reeder with Wells Fargo.
Jonathan Reeder
Hey, good afternoon, gentlemen. All my questions have been answered.
Just curious Brian, is the plan to offer the initial '18 outlook at EEI per usual for you guys?
Brian Bird
Yes, we didn't want to give you all the goodies today, Jonathan.
Robert Rowe
Because nobody would come to see us next week.
Jonathan Reeder
I just want to make sure I was going to get the goodies at all.
Brian Bird
We plan to talk about 2018 next week.
Jonathan Reeder
Okay, perfect. Looking forward to seeing that and seeing you guys down in Orlando.
Operator
[Operator Instructions] Returning to Christopher Ellinghaus with Williams Capital.
Christopher Ellinghaus
Sorry. Brian, you were talking about FFO to debt subsequent to issuance and credit rating agencies.
Can you talk about where do they rank Montana in terms of regulatory jurisdiction and how do you see that influencing your credit requirements?
Brian Bird
Yes. Chris, they don't necessarily come out with a ranking from 1 to 50, if you will, the rating agencies.
I'm sure you're aware of that. But certainly, from the feedback you've seen in reports and certainly feedback we've gotten from them directly, they're quite concerned about the regulatory environment that we have in Montana and obviously the impact it has on the significant share of our earnings and cash flows.
Robert Rowe
I would add to that and you know this of course, but perhaps 50% of the rating of a regulated utility is driven by regulatory, part of that has to do with the presence or absence of various mechanisms, part of it has to do with more direct observations.
Christopher Ellinghaus
Do you - have you estimated, or do you have the sense of, given what the credit rating agencies have communicated to you from a subjective standpoint, if not a numerical rating, what Montana's regulatory jurisdictional - I don't know where it is. Would the view of the credit rating agencies vis-à-vis Montana would that might cost you in terms of cost to capital or credit perspective security?
Have you gotten any sense of what Montana's cost to the company in terms of capital?
Brian Bird
It's a good question, Chris. We haven't necessarily quantified that for public consumption at this point in time.
I would just say that we've thought about an impact on a going forward basis. Obviously, our debt that's out there is First Mortgage Bonds, it's set.
But the next time when it becomes an issue debt, obviously from a rating agency perspective, that debt is likely to be cost more than it would had we had a better regulatory environment, and it's difficult to quantify that without thinking about on a forecasted perspective. I do worry about short term debt, and just overall the viewpoint of investors, vendors, everyone we deal with in terms of a - from a rating perspective.
But we've looked at the most recent refinancing here that we dealt with. And one could argue there was based upon the participation in the rates that were done there from a credit spread perspective, that was a 5 to 10 basis point impact from that issue alone.
Robert Rowe
What we've - your question is important and what we have been able to do, and you've seen this over the years is, go to the debt market longer term and lower cost, and that's produced a real benefit. We've been able to lean relatively more on debt in the capital structure.
That's produced a significant benefit and that's allowed us to deliver overall RORs that often are much, much lower than you're seeing among our peers. Moody's was very direct in what they had to say, and you've seen the actions we've taken in response to that.
So, their - the costs are tangible. And I do think that regulators should be in ROR.
Brian Bird
And the best point, and I think this will be fair on a going forward basis, if this continues, customers' costs are going to go up from an ROR perspective in 2 fronts, right? The debt costs are going to go up and you're going to have more equity in your capital structure, and obviously equity costs more than debt.
Christopher Ellinghaus
I certainly would make the argument even if it's maybe not quantifiable that you could certainly make the case that the cost of equity has risen certainly versus a few years ago from the recent docket activity, certainly the QF docket, but do you think you'll maybe try to demonstrate to the commission the rising cost of debt and/or equity, when you make your filings in the fall?
Brian Bird
I think it's fair [Technical Difficulty] cost of capital in any particular rate case. But to your point, obviously if the company is exposed to more risk, it should require a higher ROE, and you can go back as far as the removal of LRAM, the exposure we have on existing trackers let alone reducing our ability to get full recovery of our costs from our trackers, all of these things add to property taxes.
If we're not able to, as we're statutory allowed to get 60% recovery and those increases, all of those risks, increasing risks, should be increasing the cost of our equity.
Christopher Ellinghaus
I couldn't agree more. One last thing, vis-à-vis the QF docket quarter, are you aware of any place else in the country that has anything remotely like that similar standard that the commission is attempting to set?
Robert Rowe
No.
Operator
And we're standing by with no further questions at this time.
Travis Meyer
Well, again thank you all for the good discussion, and it sounds like we will be getting to see many of you in just a few days and we look forward to that. Take care.
Operator
This does conclude today's conference. We do thank you for your participation.
You may now disconnect.