Feb 17, 2017
Executives
Travis Meyer - Director, IR Bob Rowe - President & CEO Brian Bird - VP & CFO
Analysts
Michael Weinstein - Credit Suisse Joe Zhou - Avon Capital Advisors Paul Ridzon - KeyBanc Capital Markets Chris Ellinghaus - Williams Capital Group Paul Patterson - Glenrock Associates Brian Russo - Ladenburg Thalmann & Company Jonathan Reeder - Wells Fargo Securities
Operator
Welcome to the NorthWestern Corporation Fourth Quarter 2016 Financial Results Conference Call. Today's call is being recorded.
And at this time I'd like to turn the conference over to Mr. Travis Meyer, Director of Investor Relations.
Please go ahead, sir.
Travis Meyer
Thank you, Vicki. Good afternoon and thank you for joining NorthWestern Corporation's financial results and conference call and webcast for the year-ended December 31, 2016.
NorthWestern's results have been released and the release is available on our website at NorthWesternEnergy.com. We also released our 10-K 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; and we also have several other members of management with us today in the room. 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 mind 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 may 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 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 our publicly update our forward-looking statements with this presentation -- or this presentation for any reason.
Although our expectations and beliefs are based upon reasonable assumptions, actual results may differ materially. The factors that may affect our results are listed in certain of our press releases and disclosed in the Company's Form 10-K, 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 today and can be found on our website, again at NorthWesternEnergy.com, under the Our Company, Investor Relations, Presentations and Webcast link.
To access the audio replay of the call, dial 888-203-1112, then access code 5668902. I will now hand the presentation over to CEO, Bob Rowe.
Bob Rowe
Thank you, Travis and good afternoon, everyone. Thank you all for joining us.
I hope your 2017 is off to a very good start. I'll touch on some of the highlights and then pass the ball off to Brian Bird.
2016 net income improved by 8.6% or $13 million, as compared to 2015 and the improvement was primarily due to a tax benefit related to costs to repair a generation property, along with improved gross margin which was driven by an increase in South Dakota electric rates. These benefits were partially offset by an insurance recovery that benefited earnings in 2015, as well as by higher property tax and depreciation expense in 2016.
GAAP diluted EPS of $3.39 in 2016 is compared to $3.17 in 2015 which is a $0.22 or 6.9% improvement. On the other hand, non-GAAP adjusted EPS of $3.30 in 2016 is compared to $3.15 in 2015 and this is a $0.15 or 4.8% improvement.
That puts us in the top half of our 2016 non-GAAP adjusted EPS guidance range of $3.20 to $3.35 and Brian will come back and provide a little bit more information about the non-GAAP to GAAP comparison. The Board has approved a 5% increase in our quarterly dividend.
That will be $0.525 per share, payable on March 31 for shareholders of record as of March 15 of this year. Environmental stewardship is of concern to many of our shareholders and we're very proud to have published our first environmental report in September of 2016, highlighting our commitment to the stewardship of the wonderful natural resources across our service territory, as well as our sustainable business practices.
Most of you are aware that our Board of Directors has added Tony Clark. You all know and admire Tony for his distinguished service as a FERC Commissioner and before that, as a North Dakota Public Service Commissioner, President of ARUC and someone who always served with dignity, intellect, thoughtfulness and Tony has already been a great addition to our very, very strong Board of Directors.
One of the really great things out of the Board meeting over the last two days was the Board got to spend some time with this year's graduates of the Leadership NorthWestern program. This program takes about 35 of our employees from across the business every year and exposes them to all aspects of the business.
At the end of the year they present projects to the executive team and ultimately to the Board of Directors. Really great people.
The discussion last night between the Board and the class representatives was superb and we've had about 250 of our employees, again, everything from gas techs and linemen to engineers, customer service reps, on and on and on, about 250 of our employees through this program over the years. And it really has done a tremendous amount to improve our culture and as far as I'm concerned, that's one of the sustainability values that is an important part of who we're.
With that I'll turn it over to Brian.
Brian Bird
Thanks, Bob. On slide 5, our summary financial results, Bob did mention that net income was up $13 million or an 8.6% increase, leading to diluted earnings per share of increase of $0.22 or 6.9%.
Moving forward into the independent parts, from a gross margins perspective on the next page, our electric -- excuse me, our gross margin total is $856 million, an increase of $14.9 million or 1.8%. As you can see above, most of that increase was associated with, on the electric side of our business, $15.7 million or 2.4%, I'll talk about each of those in a minute.
But the other variance was a slight decrease in natural gas margins, primarily driven to reductions in our natural gas production rates on our production assets, due to adjusting costs in those filings to actual costs. Turning over to the electric items in gross margin.
The top of the page, as Bob mentioned early on, the biggest increase in margins of $33.5 million, increase in rates associated with our South Dakota electric rate increase. We also did have a $7.7 million benefit, net benefit from the lost revenue adjustment mechanism.
You may recall we released just over $14 million of prior reserves we had held back since 2012 and that was offset by, on a going-forward basis, approximately $7 million that we will not receive in lost revenue adjustments, netting to $7.7 million for the year. You see a $6.1 million favorable item for electric QF adjustment.
Effectively what that is, we did have that adjustment occur and a negative adjustment occur in 2015 associated with that amount. No adjustment in 2016, thus the favorable variance there.
Some other electric variances which were negative, we did have the $9.5 million negative MPSC disallowance, primarily associated with the Colstrip outage. In addition to that, we've seen our electric transmission revenues decline, primarily our OASIS revenues.
We also saw a decline in our electric retail volumes, that's primarily the result of weather which I'll talk about in moment, also the loss of some industrial load. Lastly, in terms of the electric items, the hydro generation rates, our hydro compliance order had a $1.5 million reduction there, primarily to the reduction to A&G costs associated with that business.
Those items primarily led up to a $28.2 million change in gross margin that actually impacts net income. We did have some other items, that are netted elsewhere on the P&L.
We had a $16.5 million reduction in margin, associated with our hydro operations, associated with the Kerr conveyance which occurred in 2015. That would be offset in lower expenses.
I'll talk about in a moment. We also had a reduction of $8.2 million in our margin for production tax credits associated with the Beethoven asset.
That decline in margin is offset with a benefit in our income taxes. Lastly, the item I'd mention here was property taxes.
As you know, we had a $12.5 million recovery in property taxes, that flows through trackers. But remind folks again that we only get 60% of that recovery.
Those netted up to a minus $13.3 million variance net-net there, for a total $14.9 million increase in consolidated gross margin. If we could move on to the next page, page 7, talking about weather from a full year perspective.
We show in the upper left hand side this shows that almost all of the country, well, actually all of the country was much more above average from average temperatures. You see numbers like 120 and 119 and 120 in our three states.
What that effectively means is we had the third or fourth warmest period during the year in the 122 years they've been recording temperatures in our states and so obviously very, very warm for our service territory, but for the country as a whole. When you look out on the lower side of the paper, you see 2016 as compared to historic average, you can see we were warmer on a heating degree day which of course drives our earnings more than a cooling degree day basis.
From that perspective, being so much warmer than historic average, we saw about a $15.2 million negative impact on our earnings as a result of weather versus normal. As a matter of fact, even 2016 versus 2015, there is approximately a $2 million unfavorable variance on a year-over-year basis.
If we go to slide 8, just a little bit more detail there. We're actually showing by month how weather impacted our business.
And I have to tell you that the second quarter 2016 was worse than 2015 and primarily April was a very bad month for us. On the good side, actually December did help us out a little bit in the fourth quarter but it wasn't enough to offset the bad month we had in April.
The other quarters washed out on a year-over-year basis. So net-net, again, $2 million unfavorable 2016 versus 2015.
Moving forward to the expense side of the business on page 9. Our total operating expenses, $610.3 million which is a $34.7 million or 6% increase on a year-over-year basis.
Focusing on the operating, general and administrative side of the business, those expenses went up $5.4 million or 1.8%. The two biggest items for that $5.4 million increase was the $20.8 million insurance recovery, that benefit we received in 2015.
That was partially offset by the reduction in 2016 of hydro operations costs, again from the Kerr conveyance which also occurred in 2015. If you netted those two items, you'd actually see that our operating, general and administrative expenses would have been effectively flat on a year-over-year basis.
Other key items in that category. Employee benefit and compensation costs were up $2.7 million on a year-over-year basis.
We did have higher pension and incentive costs during the year. Those were offset by lower labor and medical costs.
We did have $2.2 million higher plant operator costs. Think of running Beethoven from a full-year perspective on a year-over-year standpoint.
Those increases were really offset by what we saw as cost controls throughout our business, but one area we you saw that particularly was in our DSIP or our Distribution System Infrastructure Project expenses, those were $4 million less on a year-over-year basis. There are other items that moved there, but I basically gave you the high-level items that impacted the $5.4 million increase from an OG&A perspective.
Obviously, we did have big increases in property taxes. We spent a lot of time talking about the large increase we received from the Montana Department of Revenue and our ability to only capture of the costs in margin.
Those expenses, certainly it was a big increase for us on a year-over-year basis, 11%. Depreciation expense also up $14.6 million or 10%, in light of the investment that we made on a year-over-year basis.
About a third of that increase was associated with Beethoven on a year-over-year standpoint. Moving forward, from an operating to net income perspective, operating income of $246 million, about $19.8 million negative on a year-over-year basis.
I look at that number and I think about the $20.8 million favorable variance that we had in 2015 and of course if you took that out, we would have been flat from an operating income perspective. Interest expense itself was up $2.8 million.
All that could almost all be attributed to $2.9 million of interest associated with the MPSC disallowance. We did have some other moving parts in there, in terms of AFUDC and lower refinancing costs, but those effectively net out.
In terms of other income, that is down $2.1 million, primarily a result of lower AFUDC, partially offset by an increase in the value of deferred shares held in trust for non-employee Directors deferred comp. Lastly on income taxes which is a big part of our story this year, we saw a $37.7 million improvement in income tax.
We actually had a benefit in 2016. The biggest drivers there was lower pretax income for the generation repairs, both from a prior-year perspective and in 2016, a benefit there in terms of electing to take generation repairs on a going-forward basis as a deduction.
We also had higher production tax credits associated with full-year, such as Beethoven being in our business. Those are the big drivers, if you will.
We also are from a state income perspective, because of opting for bonus in 2016, also helped from an income tax perspective. Moving forward to the balance sheet on page 11, the primary things I'd say about the balance sheet, we see at the bottom, from a debt to capital standpoint we have leveled out at 55.2%.
We'd like to see again that number within the 50% to 55% on a going forward basis, but certainly nearer 55%. I'd also argue that on a year-over-year basis, we saw approximately a 5% increase in PP&E and an offsetting increase in shareholders' equity of approximately 5% improvement as well.
Moving forward to the cash flow statement, on slide 12. Cash provided by operating activities was $289 million which is approximately $50 million less than the prior year.
The biggest driver for that decrease on a year-over-year basis was approximately $38 million in refunds to customers, $30.8 million associated with our DDGS FERC customers, based upon a ruling to provide refunds to customers there and a $7.2 million refund to our South Dakota Electric customers, with a difference between interim and final rates in our rate case. That $289 million of capital provided by operating activities is nearly about what we invested in our cash used in investing activities which that also was approximately $100 million less than the prior year, if you think about in 2015, we also had the Beethoven acquisition, but we also had proceeds from the sale of Kerr and some changes in restricted cash.
But net-net, $100 million less in that particular category. Moving forward on page 13, to our adjusted earnings.
This, as Bob talked about, changed from GAAP to non-GAAP. At the very bottom on the left hand side, what we're trying to do, moving left to right is show our GAAP numbers.
We show diluted EPS of $3.39 with some changes I'll identify in a minute, moving over to $3.30. That compared to the prior year, look to the far right, shows GAAP for 2015 moving towards the center, non-GAAP moving from $3.17 to $3.15.
A $0.15 improvement on a non-GAAP basis or as Bob pointed out earlier, 4.8% improvement. As we look at what were the items that we did remove in 2016, we removed unfavorable weather of $15.2 million.
We also removed the disallowance, the Colstrip disallowance as a one-time item, associated with the Colstrip outage and that was also from a prior period perspective. In addition to that though, we also removed the $14.2 million LRAM reserve recovery that I talked about earlier and we also removed the prior-year period's benefit associated with the generation repairs.
So again, that seems like, in most times when we've made changes, our non-GAAP earnings end up less than our GAAP earnings, certainly was the case again this year. Compared to 2015, what we removed there again, was unfavorable weather of $13.2 million.
We removed in that particular year the QF adjustment that occurred in 2015 and we removed the insurance recovery of $20.8 million to get to the $3.15. One thing I would point out there, as you look at the individual components of the income statement there, gross margin, on an unadjusted basis was up $22.4 million or 2.7%.
OG&A, you heard me mention earlier, with just removing the $20.8 million adjustment associated with the insurance from last year brought us to flat and in fact, this page shows that we actually were slightly down on a year-over-year basis in that category, but we did see sizable increases in both property taxes and depreciation. From an operating income perspective, we were down $6.5 million.
And after taking adjustments from other income or comparison from other income on a year-over-year basis, our pretax income was actually down, unadjusted basis, $10 million or 5.6%. One thing I'd say about that, when you consider the removal of LRAM of approximately $7 million a year, the fact that Beethoven, in terms of how production tax credits work, our margins such as Beethoven being down about $3 million on an annual basis this year versus the prior year and the recovery of property taxes, the 40% recovery of property taxes that we don't get, that's about a $6 million impact.
And then we did increase pension here $2.5 million. Those items all add up to a difference on a year-over-year basis of close to $19 million.
So you can see that, even though we were down $10 million from a pretax perspective, we certainly should see improvement on a going-forward basis there. Having said all that, we did see, even after the adjusting out the prior years from the generation repairs, we had a nearly $20 million improvement in income taxes, netting to a $9.5 million improvement in net income or a 6.3% improvement year-over-year.
With that, I'd move you forward to 14 which talks about our 2017 earnings guidance. We can did finish the year in 2016, $3.39 on a GAAP basis, $3.30 on a non-GAAP basis.
You will also note that we did not change our guidance we provided here recently of $3.30 to $3.50. I'll talk about that guidance in a bit more detail in a second.
We're certainly reaffirming that guidance. As we pointed out on the slide here, that assumes normal weather on a going-forward basis.
We do have a new tax range of 7% to 11% this year versus prior year, from a tax-free perspective. Assuming 48.5 million in diluted shares, expecting no equity issuances in 2017.
And lastly, one thing I want to make sure investors are clear on, we have been talking about 7% to 10% total return to our investors and certainly, it's something we see as our long-term target to continue to provide that benefit to our shareholders, something we've certainly been able to do in the past and expect to do in the future. However, as we lay out here in the red box, in light of recent regulatory headwinds and reduced and delayed generation spending, we anticipate the near term to be at the lower eastbound of that 7% to 10% range.
Moving on to slide 15. This shows our non-GAAP adjustment from a guidance perspective going from 2016 to 2017.
Non-GAAP adjusted diluted EPS at the top of the page, $3.30. We show the components that we expect throughout the P&L during the year in a range.
That range is a zero to $0.20 increase or a zero to 6% increase, the midpoint of course at $3.40 would be a 3% increase. In light of the fact that increase is only 3%, we certainly have seen higher increases in the past there.
We took a look at our dividend policy and where we sat in our dividend range of 60% to 70%. The fact that earnings were growing at a slightly lower pace and our capital investment growth rate at a slightly lower pace, we received approval from the Board to increase our dividend 5% versus a previously planned 4% increase.
So a $0.10 increase on a year-over-year basis which should move us to pay a 61.8% dividend payout in 2017. Moving forward to slide 16, I'll pass it back over to Bob.
Bob Rowe
Thank you, Brian. Just a few things to highlight.
First, safety truly is our number one priority and at every employee meeting, that's the first thing we discuss and 2016 was a great year on the safety front. We had the fewest OSHA recordable events of any year and we had the best year for lost time incidents.
In fact, if you think of safety in terms of three-member crews, our lost time was low enough that it was less than one -- the equivalent of one crew for the year. That's a tremendous record, just in terms of people going home safe.
Second, we recorded the best customer satisfaction scores ever with JD Power and that was for overall customer satisfaction and fundamentally that's what we're in business to do, serve our customers, provide essential service. Third, we have a strong and consistent record with corporate governance and clarity of disclosure and our 2016 proxy statement which by the way is prepared in-house, was recognized as a finalist by the Corporate Secretary Magazine for best proxy statement for small to mid cap companies.
That's the award we won in 2014, but like the Patriots, we tend to go back every year. Finally, we were recognized for a strong dividend.
In March, NorthWestern was added to the NASDAQ U.S. Broad Dividend Achievers Index which is designed to represent the country's leading stocks by dividend yield.
Finally I would say, as Brian highlighted the very real challenges we had in 2016 and it was a real test for management discipline and I think the great management team I'm privileged to work with really did deliver. That wouldn't have happened if the entire team hadn't stepped up and been focused on efficiency, discipline and providing our customers the service that they all depend on.
I'll touch briefly on just a couple other key events, before we open it up to your questions. First as you know, we did file a Montana natural gas general rate case last year and that case has been in process.
If you look at page 17, the table in the left hand corner, that's really the story of the substantial financial commitment we made to our customers. You see the growth in our rate base investment, just from 2011 through 2015, of almost $51 million on the transmission and distribution side and then add to that the natural gas supply related investments for an overall gas utility infrastructure investment of over $432 million.
That's a substantial commitment to our Montana customers. Upper right, you see depicted the key items in the request that we filed.
Cost of service related to transmission and distribution of $7.4 million, costs associated with the three natural gas acquisitions and that's an allocation of A&G to those facilities, for a total request of 10.9%. Cost of capital, because we're financially solid, we're able to deliver our customer service at a very low overall rate of return and you see we have requested cost of equity of 10.35%, 46.79% ratio, cost of debt of 4.67% and so of course for a 53.21% ratio and overall rate of return of 7.33%.
Just a couple of weeks ago, two interveners did file testimony in the case. It's the Montana Consumer Council which represents our customers and then the large customer group.
Notably, there was no proposal contesting the overall capital structure. Both parties did propose, recommend lower returns on equity of between 9% and 9.35%.
One thing that I mentioned, this case is significantly driven by the need to recover the costs associated with investments in service. Something that was an important part of the case we filed, was testimony by our Transmission and Distribution Vice Presidents, Mike Cashell and Curt Pohl describing the operation, investments, the plans for those systems.
They answered extensive discovery of course, but I thought it was significant that there was no intervener testimony addressed to those issues. I'm hopeful that indicates that everyone understands just how important that investment is.
Earlier this week, the Montana Commission had an opportunity to raise any additional issues they would like to see the parties address in the case and they did not identify, formally identify any additional issues to be included in the case. So the next step will be discovery on the intervener testimony, leading to our reply testimony in April and then a hearing in May.
We look forward to a decision later this year. On slide 18, Brian mentioned our capital forecast.
This gives you the story broken down by electric and natural gas, South Dakota, Nebraska and Montana. And what you see is the overall capital plan is somewhat lower for 2017 through 2021 at $1.58 billion.
That is a reduction from the prior $1.66 billion. That's primarily a result of reduced or delayed spending on necessary generation assets.
That's both in Montana and South Dakota. So these investments are of course heavily focused on our transmission and distribution systems and supports.
We do anticipate managing our capital expenditures to provide overall more levelized annual spending. That does include our spending on generation.
And we anticipate being able to fund these expenditures with a combination of cash flows, aided by our NOLs, that are anticipated to be available through into 2021 and then by long-term debt. And as always I'll point out that if other opportunities arise that are not included in these projections, new equity funding could be available.
Now, I'll turn to our Montana electric supply resource plan which always is a focus of attention. I would point out that during the same time that we were working on the Montana supply plan, our supply team was very busy preparing and submitting a South Dakota electric plan and the South Dakota Commission did obtain a third-party evaluation of the plan.
The plan narrative is shorter and less detailed in South Dakota than in Montana, but the analysis and the methodology are the same. So the South Dakota Commission did obtain a third-party review and that third-party review concluded that the methodology was appropriate, was reasonable and the conclusions were appropriate.
So again, I don't want to lose sight of that activity in South Dakota. Turning to the Montana 2015 resource plan, first, page 19 highlights how we're compared to our peers in the west, pretty much bare naked, when it comes to planning reserve margins.
We have talked about the plan as it was being developed. This was of course the first post hydro Montana plan and if you think about the transformation in our portfolio in a very short period of time overall.
So job number one was optimization of the hydro system and you can check that box. Job number two, what our supply folks refer to as co-optimization of the hydro system, with the rest of our assets.
So using the hydro system to provide services, I mean, we have to lean on other assets, less than might otherwise be the case. The two major areas of focus then, beyond that, are first of all planning to meet incrementally over time the need for sustained peak or sustained capacity.
And if you think about our load in Montana, we're the supply provider to small and medium size customers. Typically the largest customers, the industrial customers who have very, very high load factors, are served directly from the market.
That means that we have very, very swingy loads, driven particularly by weather and that tends to be sustained cool periods in the winter. If we're not available to meet those needs, it creates a real health and public safety risk, so we have to be able to meet those needs.
And the plan does identify that as need number one. And then as depicted on page 19, we have negative reserve, planning reserve margins and negative 28%, it's actually a far sight better than we were just a couple of years ago.
Again, essentially, we're leaning on the regional market to meet these needs. So the plan was submitted, both a pretty extensive narrative and supporting documents to the Montana Commission.
When it was submitted, we didn't request the opportunity for a presentation, at the time we weren't able to do that. But the good news is, we do have that now scheduled.
The Commission appropriately put the plan out for comment, received comments and then did issue its own statement and that statement acknowledged the need for additional capacity, but also then identified specific concerns related to the plan. And we're pleased that they've now set a workshop in fact for February 27, to review the plan and hopefully we'll be able to have, I hope, a detailed and robust discussion about the plan and our experts will be able to answer questions.
If you turn to page 20, this is a depiction of the resources we have available to meet our customers' capacity needs. This isn't a depiction of all the resources we have, but only of those resources that we can count on to meet those sustained peak needs.
Just another word and I think you all are pretty familiar with this. In terms of the overall composition of our Montana portfolio, it's about almost 40% hydro and year-over-year, we have had the opportunity to make very cost-effective investments, last year and this coming year as well, in incremental generation at existing hydro facilities.
So about 40% hydro, already almost 20% wind, 18% coal, 7% QF thermal and then about 17% natural gas. That's in terms of installed capacity.
So hydro is the base overall. We actually have more wind on our system than coal, setting aside the QF contracts and we also have substantial additional wind under contract coming onto our system.
In terms of the assets that are able to meet our customers' peak demands, again I'd turn you to page 20 and what you see is significant exposure in terms of meeting winter peak, with current capacity and then beyond that capacity needs, plus any reserve. And this, again, we look very much like the region, with the exception that we don't serve the industrial sector and so don't have the flexibility that others might have.
So in light of that situation, on February 13, we did issue a request for a proposal to bite off probably the first small piece of this need and the RFP went out open to all resources. It's being administered by a third party.
It's a very rigorous process and we're looking forward to and expect to see really quite a variety of projects submitted in response for evaluation. So with that, I will shut my trap and we'll open it for questions.
Thank you.
Operator
[Operator Instructions]. And we will take our first question today from Michael Weinstein with Credit Suisse.
Please go ahead.
Michael Weinstein
I was wondering if you could -- by the I way, thank you for a very detailed presentation. Just the first question I have is, maybe you could tie the lower CapEx forecast for generation to the RFP situation, because it sounds like you're moving forward with the RFP, but the lower CapEx forecast would indicate you have less confidence in the outcome or something?
Maybe you could go over that and explain it a little better.
Brian Bird
What primarily we did here, wasn't just Montana, we did push out South Dakota as well, based upon current rules in SPP and how they treated wind resources. And so we reduced a little bit in South Dakota and pushed the timing out there.
Montana, we did it as well, we pushed out the timing and reduced some of the spend there. I think have you to remember though, the overall program we're talking $1.3 billion, the reduction here I think net-net is -- we're talking less than $100 million change here in our overall capital spend plan here.
This is a long-term view and obviously to complete this program that we're talking about is going to be in a decade or so. So we're certainly very, very supportive of what we need to do here and ultimately we need to persuade the Commission and others that this makes sense to move forward.
As Bob pointed out, there is a huge risk here in terms of being bare naked in terms of reserve margin.
Bob Rowe
One thing I would add to that, we talked heavily about Montana. But in South Dakota for the last several years, as we have discussed in prior calls, we put a lot of effort into integrating into the Southwest Power Pool.
We've done that now. We're learning how that system operates.
We're seeing some real benefits there for customers. I think that's reflected in the plans as well.
Michael Weinstein
Right. And is the move towards the lower end of 7% to 10%, is that -- like at what point do you think you can mitigate that and get back into the middle of the range?
Brian Bird
That's a great question, Michael. Once we're investing in a generation perspective mode, I think you start moving up within that range.
Obviously, you can see that's a tremendous amount of capital on a going forward basis. We continue to evaluate our infrastructure needs, as we talk about DSIP is rolling off and though we do have capital spend here in transmission and others, we continue to evaluate the level of spend there.
There could be upward movement there, but I see us moving upward within that range when we're taking on the generation investment in earnest.
Michael Weinstein
Like in 2018 time frame or so, preparing for that?
Brian Bird
Early to tell, Michael, I think is a fair answer.
Bob Rowe
What we're doing here obviously is trying to be as transparent as we can possibly can be with you and state what we think are realistic prospects.
Brian Bird
I think, Bob, one of the other thing we want to might talk about too is, we have great resource profile in Montana and as you talked about hydro and wind. And looking at what we're doing in South Dakota from a reliability standpoint, in terms of our mix as well, there could be investment associated there that we're still in the planning process.
Bob Rowe
Specifically one of the tasks we've taken on in the South Dakota plan is doing an analysis of the existing facilities from a reliability perspective and trying to anticipate the vintage of the fleet.
Michael Weinstein
My last question is, maybe you could talk a little about the upcoming filing for the annual report in April. What exact day is that going to happen?
And what's your thought now on a Montana electric rate case?
Bob Rowe
The filing will be due on April 30. That is our annual report.
It's hydro compliance order, the Montana Commission directed that we communicate our future plans concerning an electric rate case as part of the April 30 report and that is what we intend to do.
Michael Weinstein
You intend to communicate your plan?
Bob Rowe
Correct.
Michael Weinstein
And does the proceedings in the gas rate case give you any optimism in terms of how you might be treated, though?
Bob Rowe
It's too early to say. What we know obviously is we have filed our testimony and we've seen testimony from the two interveners and then of course discovery.
Operator
And the next question comes from Joe with Avon capital advisors.
Joe Zhou
Just a quick one on the potential tax reform. So how much is your repair tax deduction, after the accounting change, on a per-year basis?
Brian Bird
Well, I think what you can do is you can go to our tax reconciliation that's in our slide deck and after the fact and what happened is you saw in generation repair is the increment from generation repairs of $17 million in 2016 versus 2015. If you looked at our T&D repairs, it was pretty much the same on a year-over-year basis.
Our total flow-through repairs deduction in 2016 was $41.1 million. Is that helpful, Joe?
Joe Zhou
That's helpful. And what if in the upcoming tax reform, who knows what happens, but what if a portion of the tax -- of the repair tax deduction is eliminated, how would you look at that?
Is there any way you can mitigate that?
Bob Rowe
I'll let Brian answer the specific question, but maybe I'll preface that and caution us to be careful about any what-ifs at this point and just speak generally to how we're engaging with the whole tax reform process. Obviously, we're very active members of EEI and also AGA.
We're pleased that their positions are at this point quite closely aligned and we've been fully involved in development of those positions. We support them.
Our Tax Director is exceptional, in his ability to run the analysis. What we're doing generally, recognizing that we've got at this point at least two very fluid targets, is being able to analyze first of all the House GOP plan and then secondly the administration plan and we're looking at a number of factors which include effective tax rate implications, earnings implications, very importantly, customer rate implications, both near term and long term and particularly long-term since that's how we invest cash flow and then NOL implications and availability.
Brian?
Brian Bird
I think, Joe and Bob's spot on in terms of -- it's certainly hard to talk about these plans. We've see proposals, of course from the GOP and I'll say the Trump plan.
I think what we could tell you is the GOP plan as it's laid out today certainly would be negative from our perspective, in terms of the 20% tax rate and the fact that we would lose interest deductibility. Those are key issues with that particular plan.
The Trump plan is what we'd argue slightly neutral to positive. Obviously the lower tax rate, 15% tax rate and the potential optionality of getting interest expense deductibility.
I think, Joe, that's as far as we want to take you today.
Operator
We'll now go to Paul Ridzon with KeyBanc.
Paul Ridzon
Is any of the pullback of the generation related to demand growth slowing or is it really just regulatory?
Bob Rowe
No, it really doesn't relate to demand growth slowing. The plans were obviously prepared very recently.
But we're taking incremental you approaches in both South Dakota and Montana.
Operator
Next is Chris Ellinghaus with Williams Capital.
Chris Ellinghaus
Brian, it sounds like maybe 2017, you've gotten through some of these adjustments that you've had to make. You got through the hydro and the Montana disallowances and those things.
2017 sounding like it might be a fairly clean year, is that true?
Brian Bird
Well, Chris, I think every time we look at a particular year we might think that. But to your question, I feel a little bit better that we don't have a lot of prior-year type items that could creep up on us.
I certainly don't want to say, without knocking on any wood, that there couldn't be issues. Obviously we know the gas rate case is a big item for us in 2017.
Chris Ellinghaus
Right. Okay.
The annual report filing for later in the year, does that preclude you from filing an electric case before April or is that just the deadline that the MPSC set for indicating your intentions?
Bob Rowe
By April 30, we'll file the report and in that report, we're instructed to tell them what our plans are.
Chris Ellinghaus
Okay. As far as the supply plan in Montana, can you just give us a little color on what you've heard in terms of the concerns from the Commission?
Bob Rowe
Just a word about our planning philosophy. Our goal is long term, least cost, least risk.
It's an iterative plan, updated every several years. Typically we have action items in terms of resource acquisition of some sort, action items in terms of operational issues, study issues, things like that.
Many of the comments from third parties were from particular advocacy perspectives and that's entirely appropriate. We heard comments about the need to consult which we do and we agree.
We heard comments about looking to a range of solution. There were questions about whether or not we had factored in full optimization of the hydro system.
Questions about how we were looking at the shortfall, in relation to peak, being our own peak and not necessarily a system peak. And questions about whether or not we were making the right assumptions about capacity shortfall and questions about how we were thinking about timing of the introduction of new assets.
As I mentioned, a question about whether or not the range of options looked at in the plan was too narrow And as I indicated, we've gone out with an RFP. Of course, the point of an RFP is to test real resources in the market and to identify that entire range of options.
We think these are actually very good questions. Of course, we would have liked the opportunity to address those questions, when the plan was filed.
But we're very, very appreciative that we will have the opportunity to discuss each of those with the Commission.
Chris Ellinghaus
Do you have any participating project in the RFP?
Bob Rowe
No.
Chris Ellinghaus
Okay. And lastly, can you just give us a little color on the South Dakota supply plan, how did you feel that was received?
Bob Rowe
First on the Montana side, we're certainly inviting build transfer options and the plan does identify values in utility ownership. We do expect to see that proposal, but we're not ourselves submitting a bid.
The South Dakota plan, they don't file or they don't release a comment on the plan. But again, based on the third-party evaluation which concluded the methodology was reasonable, the conclusions were appropriate, we call that a very good reception.
Operator
We'll now go to Paul Patterson with Glenrock Associates.
Paul Patterson
I want to touch base on two things involving these news releases that have been coming out from the Commission which in my experience over the years is unusual. So first is the IRP that you discussed on the call.
The other is this -- rather sharp statements regarding the property tax tracker and its impact on rates and their apparent frustration with that. As investors, what are we supposed to think when we see these comments?
How would you describe the regulatory relationship? And that's how I'd ask the question.
I don't know how else to put it. But they seem rather -- they seem to be taking you to task, both on the property tax tracker and on the IRP.
You read the comments. You read the release.
What do you make of that?
Bob Rowe
I cannot and should not speak for the Commission. We take responsibility for our part of the regulatory relationship.
We respect the Commission and the Commissioners as public servants and we respect them individually. That's the approach that we want to take.
We also and I think this is where your question is going, recognize that our regulators in all three states and at the federal level, but because of the portion of our investment that is in Montana, certainly in Montana, we recognize that their decisions are perhaps more important than anything else, in our ability to invest in serving our customers. We've got about $4.3 billion of assets, utility assets dedicated to serve our Montana customers.
We're stewards of that. They are stewards of that as well.
Our responsibility is to treat the Commission with respect which we do, to provide them as much information as we possibly can and we're human. We don't have access to every bit of information they might want, but to do the best job we possibly can.
Beyond that, I'm very--
Paul Patterson
I'm not suggesting that you -- I know that you are definitely focused on communicating and working with your Commissioners in a constructive way. What I'm suggesting or not suggesting, what I'm asking is how should we think about the regulatory relationship and the ability to perhaps improve it?
I mean, again, the reason why I say this is because it's remarkable. These are news releases.
There's no nuanced statements. These are things they're putting in press releases which again, like I said, I've been doing this for a while.
I've never seen really anything quite like it. I just, I'm just trying to get a feel for how we should think about these comments and also the recent press reports about customers being unhappy with their most recent bills and what have you.
That's the context that I'm suggesting. I'm not suggesting that you are -- I would hope you that aren't just being cavalier about this or anything.
But I just was trying to get a sense as to what the plan is, with respect to something like that?
Bob Rowe
Our approach has been, again, to try to be as forthcoming and constructive as possible. Where we make mistakes, we want to own that.
I've certainly been in a position to apologize where we have or where I have made mistakes. We'll continue to do that.
Couple of background items, obviously, Commissioners in our states are elected and we're just coming out of a campaign season. So they have all had to take positions, it's particularly a reality in Montana, you have to take positions as part of a campaign.
Currently, we're in a legislative session and as is usually the case in Montana, there tend to be fairly significant utility-related issues and the Commission typically is quite involved, advocating its view, as are we. And again, we've tried to be very respectful and appropriate in how we've advanced our positions.
Third, I mentioned that we had just a fantastic year last year, from a customer satisfaction perspective and that included in Montana. But we have had a winter the likes of which we have not seen, starting in late December into January in Montana, closer to what used to be a normal winter and that's a surprise.
One of the challenges of course in the way investor-owned utility rates are set, is you're recovering all those $4.3 billion in primarily -- paying for those assets, primarily fixed cost, through volumetric prices. So as those meters spin more and more, that does have real impact.
And we've tried to communicate to our customers that we understand their situation, try to work with customers individually and just across the board, to manage through that and that's the approach that we need to take consistently.
Paul Patterson
Just finally, the HB 189 that the Commissioners seem to be supportive of, how should we think about that, if that were to pass?
Bob Rowe
Which one is that?
Paul Patterson
I think it has to do with the property tax.
Bob Rowe
The property tax.
Paul Patterson
Let me -- I think there's HP 193 and 189. I think you have a better idea about that.
One has to do with the controlling of purchase power cost or what have you and the other one I thinks has to do with the automatic increases.
Bob Rowe
The two areas that the Commission -- two of the areas the Commission has been quite interested in are the supply tax tracker on the electric side and the property tax tracker. As you know, around the country, tracker mechanisms, either statutory or in regulation or by order are very, very common and used for exactly this purpose.
So we obviously strongly support continuation of the trackers. The tax tracker is important in Montana, simply because the centrally assessed property taxes that we pay are extremely high and we agree with the Montana Commission's concern about the level of those taxes.
In fact, one of the things that the Commission has ordered us to do is to begin to break out the tax amount on our electric and gas bills, it's essentially a line item. And that actually adds -- it creates customer awareness about that impact, but I think that also adds to customer frustration.
Our -- both electric and gas, as you saw this in the deck on the gas side, are significantly below national averages. That's something we're quite proud of.
But as part of those rates, the tax bill in Montana is significant. But we do need to be able to track and recover.
It's worth noting that essentially you, as shareholders, have some fairly significant skin in the game, because between rate cases, we only recover 60% of the change in that centrally assessed tax. Now, I mentioned, we've got a great tax department.
They work very hard every year to manage that Montana tax bill and ultimately, that is a benefit. It's a benefit to you, it's a great benefit to our customers and that frees up other resources to commit to serving customers.
It's a very important mechanism for us, particularly because the impact of Montana property taxes on the Company and on our customers is so great.
Paul Patterson
Okay. But if this HB 189 and for that matter 193 were to pass, how should we think that would impact the Company?
Bob Rowe
It will impact us quite negatively. Brian?
Brian Bird
I think what it does is it's certainly likely to accelerate the need for rate cases.
Paul Patterson
Okay. HB 193 the same thing?
Brian Bird
Indeed, same thing.
Paul Patterson
Okay.
Brian Bird
Both cases.
Operator
We'll take the next question from Brian Russo with Ladenburg Thalmann.
Brian Russo
I realize on slide 18 you note the reduced and delayed CapEx profile, to provide a more levelized annual spend. Does it have anything to do with the Montana Commission's rather sharp criticism of your IRP plan?
Bob Rowe
No.
Brian Russo
And would you move forward without pre-approval on anything?
Bob Rowe
That's going to depend on the projects, size of the projects, nature of the projects. But we certainly -- and we want to communicate very, very closely with our regulators in all of our jurisdictions, about our plans.
Brian Bird
I think just you may be aware moving forward with an RFP is a very small component of our overall needs for this. Again, we'll have to demonstrate it's in the best interest of customers, as we go through that process.
But primarily here and you might remember, Brian, on previous calls we've always shown in this fifth year a big drop-off in our capital spend. You may have heard me talk about in the past we're going to try and smooth this out a bit.
But we did decrease a bit, some of the spend in terms of generation, both in South Dakota and Montana and it has moved out a little bit, it's more a function of timing than anything.
Brian Russo
Just to clarify, the House Bill 189, that's designed to repeal just the property tax adjustment mechanism or all adjustment mechanisms?
Bob Rowe
That's just the tax adjustment mechanism.
Brian Russo
Okay. Got it.
And then, I think you had some expenses related to the hydro compliance order. What was that?
Brian Bird
We had a $1.5 million adjustment which was effectively an amount that was associated with A&G costs that ultimately the Commission felt should be incrementally removed with the removal of Kerr from our profile. So those costs wouldn't be able to allocated elsewhere.
Brian Russo
Okay. Lastly, are there any pending or open regulatory dockets we should be aware of, outside of the gas case?
Bob Rowe
I think there are always lots of pending open dockets. I think we've talked about the key Montana dockets.
Operator
[Operator Instructions]. We'll go to Jonathan Reeder with Wells Fargo.
Jonathan Reeder
So I appreciate all the additional commentary you've been giving. Brian, the previous plan, I think, had $187 million related to the new fossil generation in Montana and South Dakota.
How much generation spend is included in this new plan and then also, how much got delayed versus removed altogether?
Brian Bird
We have $125 million that's in the plan. I believe that's approximately $100 million for Montana and $25 million for South Dakota.
I think again, I reiterate the amount of spend we had in South Dakota was also reduced because of the amount of wind that -- it's getting more credit, if you will, in the SPP process. That's reduced the amount of spend in South Dakota.
And also, think about this, that $100 million of spend, because you pushed some items out of 2021 into beyond, that's also why you've had a reduction in spend here, it's more of a timing issue. To answer your question directly, $ approximately $100 million of Montana spend to $25 million of South Dakota spend.
Jonathan Reeder
Was the South Dakota portion the only thing that got reduced, eliminated altogether if they had a 10 year plan or something like that?
Brian Bird
I think that reduced in this plan, I think we had more than $100 million in Montana in this plan. One could argue that was either reduced or deferred.
Jonathan Reeder
Right. But it sounds like the Montana portion that isn't in the plan anymore, was more deferred than being eliminated.
Brian Bird
Probably the best way to answer that, Jonathan is, we haven't reduced our $1.3 billion plan here.
Jonathan Reeder
And then do you think it's possible to get the PSC's blessing on the RFP that you issued, following your workshop next week? Or subsequent ones?
Or is there no really way to get a pre-approval until the next supply plan is filed and accepted?
Bob Rowe
The goal for the workshop really is to gain, actually I would say a mutual understanding. We want to understand much more directly their questions and we want to be able to answer those questions, as best we can.
Jonathan Reeder
Okay. So pre-approval, that's likely not to come out of this process, it would just be when you file your next plan and it gets accepted, that you could pursue pre-approval for subsequent generation.
Bob Rowe
At this point there's no resource, no specific resource that we're planning to file a request for approval for.
Jonathan Reeder
Okay. And then Brian, your comment that you expect to be at the low end of the 7% to 10% range in the near term, does that at all take into account potential allowed ROE headwinds in Montana or is that completely separate?
Brian Bird
Jonathan, that all comes into play in our consideration on a going-forward basis.
Jonathan Reeder
Okay.
Brian Bird
Takes into consideration rate cases and rate case outcomes on a going forward basis. It takes into consideration the ability -- the amount of cost control we can put in place.
It takes into consideration the growth in terms of these projects, primarily in this plan from the infrastructure standpoint and the T&D side of our business. It takes into consideration all of that.
Jonathan Reeder
Okay. Great.
And then last question, following up on, I think it was Paul that was asking earlier. Do you believe that some of the recent adverse PSC rhetoric and orders will largely go away, once you file an electric rate case?
Or in other words, is it all of this about lowering your earned ROE for Montana Electric and once that's been achieved, you'll be able to work constructively with the Commission again?
Bob Rowe
The best that I can say really is our goal very much is to work constructively with the Commission. I absolutely believe that Chairman Johnson has the same goal.
Beyond that, I really can't speak for the Commission. We respect the office, respect the Commission.
Jonathan Reeder
Okay. I understand.
Brian Bird
I'd add too, Jonathan, a lot of the questions asked today were questions that would be great questions for the Commissioners themselves. We can't answer them.
Jonathan Reeder
All right. We'll keep that in mind and looking forward to your comments in April and May.
Operator
And there are no other questions. I'd like to turn it back to Bob Rowe for any additional or closing remarks.
Bob Rowe
Thank you very much for the good discussion. We hope you have a great weekend, look forward to seeing many of you in person and visiting with most of you next quarter.
Operator
Thank you very much and that does conclude our conference for today. I'd like to thank everyone for your participation.