NorthWestern Corp

NASDAQ:NWE

Earnings Call Transcript 2018-Q1

[Operator]

Good day, everyone, and welcome to today’s NorthWestern Corporation First Quarter 2018 Financial Results Conference. Just a reminder that today’s call is being recorded.

At this time, I would like to turn the conference over to the Investor Relations Officer, Mr. Travis Meyer. Please go ahead, sir.

[Travis Meyer, IR Officer]

Thank you, Laura. Good afternoon and thank you for joining NorthWestern Corporation’s financial results conference call and webcast for the quarter ending March 31, 2018. NorthWestern’s results have been released, and the release is available on our website at northwesternenergy.com. We also released our 10-Q, premarket this morning.

On the call with us today are Bob Rowe, President and Chief Executive Officer; and Brian Bird, Vice President and Chief Financial Officer. We also have several other members of the management team with us in the room today to address your questions.

Before I turn the call over for us to begin, please note that 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 the Safe Harbor language.

During the course of this presentation, there will be forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often address our expected future business and financial performance and often contain words such as expects, anticipates, intends, plans, believes, seeks or will. The information in this presentation is based on 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 will open up 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 at northwesternenergy.com under the Our Company, Investor Relations, Presentations and Webcasts link. To access the audio replay of the call, dial 1800-485-8312, then access code 4517992, again that’s 800-485-8312 access code 4517992.

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

[Bob Rowe, President and CEO]

Thank you, Travis. Good afternoon, everyone. And thank you for joining us. We are calling in from our General Office in Butte, Montana where there is still, looking out of the window, snow on the mountain, but we think it may finally be spring.

As we start, I should say here is a throaty growl of a Harley through the window. It is not Brian Bird’s midlife crisis. It’s Travis’s midlife crisis.

We had a successful Board meeting yesterday. The Board last night had dinner with our leadership, NorthWestern Class, which is one of our very viable employee development programs, and then had a good annual meeting this morning, and all of the proposals passed overwhelmingly. And we certainly thank you for your sophistication.

Very importantly, this was Dr. Linn Draper’s last meeting as Board Chair, and he has guided us since 2004 and has been an extraordinary mentor, leader and friend. Good news is the Board has selected Steve Adik. Many of you know he’s the long serving chair of the audit committee to step up now as Board Chair. And Steve will in his own way continue the focus and the dedication that Linn displayed, and also Steve displayed a very effective an d engaged audit chair. So, we continue to be fortunate with the Board leadership that we enjoy.

Turning to first quarter highlights. Operating income decreased $3.3 million as compared to the same period in 2017. However, if you adjust to remove the $7.3 million revenue deferral that was recurred during the quarter related to The Tax Cuts and Jobs Act, operating income would have actually increased by $4 million or 4.6%. Net income for the quarter was up $1.9 million, 3.4% as compared to the same period in 2017. That was primarily due to cold winter weather, an increase in Montana natural gas rates, increased demand for electric transmission and lower operating, general and administrative expenses.

As a result of the increased average share count, diluted earnings per share increased less than net income to $1.18 as opposed to $1.17 during the same period in 2017. Adjusted non-GAAP earnings per share were $1.11 as compared to $1.13 during the same period in 2017. And the Board acted yesterday to declare a quarterly dividend of $0.55 per share, payable on June 29th to shareholders of record as June of 15, 2018.

And Brian will now begin with the summary financial results.

[Brian Bird, VP and CFO]

Thanks, Bob. On page four, summary financials. Net income was $58.5 million which was $1.9 million or 3.4% increase on a year-over-year basis for the quarter. Bob mentioned, diluted earnings per share of $1.18 on a GAAP basis is one penny or nearly 1% better than the prior year period.

Moving on to page five, gross margin. Gross margin was $245.4 million, which was down $2.1 million or 0.8% on a year-over-year basis for the quarter. However, that decrease in gross margin, when you look at it from a change in gross margin that actually impacts net income that was actually up $4.1 million or up 1.7%, primarily a result of both our gas electric business performing well during the quarter. The area where we had a change in gross margin that offset within net income was offset elsewhere in the P&L. We had a large deferral $7.3 million of revenue deferral due to the change in income tax law in terms of how work handling getting back our customers the income tax benefit that we’ll be receiving in 2018. Those changes with some other tracker changes that are offset elsewhere in the P&L totaled to a decrease of $6.2 million net. And of those two items, the 4.1 increase and the 6.2 decrease, net 2.1 decrease in consolidated gross margin.

Moving on to page six, looking at weather for the first quarter. We were colder in all jurisdictions versus the prior year and versus historic average. We’d point out that -- remind folks that Montana of course is the largest share of the business, greater than 80% of our business and that was slightly colder in ‘17 on a year-over-year basis, and obviously much colder in South Dakota and Nebraska on a year-over-year basis. I would argue that the favorable weather in Q1 contributed approximately $4.8 million pretax benefit compared to normal, and $1.6 million pretax benefit as compared to Q1 2017. And we’ll talk about that more later in the presentation.

Moving on to page seven, in terms of operating expenses. Operating expenses were $160.9 million, an increase of $1.2 million organic, and an increase of 0.8% on a year-over-year basis. Looking at the components of that though, operating and general and administrative expenses were actually down $4 million or just over 5%. The explanation for that below shows that when you actually exclude the non-employee directors deferred comp and the employee benefits, one being decrease if you will and one being an increase, those are both offset primarily in other expenses. Looking at the remaining items though, decrease in maintenance expense, labor expense, less DSIP because of the elimination of the amortization associated with DSIP and other costs coming down, we continue to manage our costs well to help offset slower margin growth than we’ve seen historically. Below that and from a property taxes and depreciation perspective, those are both up 7% and over 5%, respectively, again primarily due to plant additions at the Company.

Moving forward to page eight. Top of the page, operating income $84.5 million, down $3.3 million or 3.8%. Below that, interest expense, down slightly, $0.4 million or 1.7%, primarily result of the refinancing that occurred last year, offset by slightly rising interest rates, leads us to -- and other expenses being flat leads us to income before taxes of $60.4 million, a decrease of $2.8 million or down 4.4%.

Lastly, income tax expense, $4.7 million favorable on a year-over-year basis, primarily result of the 21% tax rate compared to 35% tax rate last year, so a lower pretax income, that’s partially offset by lower flow-through repairs deductions. And I’ll talk about that more in a moment.

Lastly, then, net income, again as we pointed out $58.5 million, $1.9 million improvement year-over-year.

Page nine, I think is a good way to kind of think about the quarter, which displays our first quarter 2017 to 2018 pretax income reconciliation. What I’d point out here is it is actually a pretty positive quarter. And when you look at from an expense standpoint and from a margin standpoint, all of those items shown in blue were improvements on a year-over-year basis in pretax. There is really two negatives I can speak to and one is the deferral, largely offsetting the tax expense line.

And then property taxes and depreciation again for growing company, expect an increase in that on a year-over-year basis. That led us to, if you take in consideration all of those factors, pretax income goes from $63.2 million down to $60.4 million, which is a 4.4% decrease. So, if you exclude and the deferral which again is offset in income taxes, our actual pretax income would have been up 7% on a year-over-year basis.

Moving to page 10 on the income tax reconciliation. At the bottom of the page, and again remember, income tax as $1.9 million for 2018, $4.8 million improvement on a year-over-year basis and that equated to an ETR of 3.2%. The moving parts associated with income taxes, the income tax calculated at federal statutory rates was $9.4 million better; the lion share of that of course is associated with the lower rate and partially also includes lower pretax number.

But below that in terms of the permanent or flow through adjustments, there is a big swing, if you will, in state income tax, really two things going on there, the loss of bonus depreciation impacted the benefit that we typically receive in that particular line item and also the lower rate had an impact.

The flow through items associated with repairs deductions, and plant and depreciation items also impacted by the lower rate, negatively impacting us. and lastly the share based compensation which is primarily driven by changes in our stock price also had a slight negative net to drive our total change on a year-over-year basis of $4.8 million.

Moving forward to the balance sheet. Primarily, a point out there, as you can see at the bottom of the page, we continue to focus on the business, utilizing our ATM program and other to continue to delever the Company. Our ratio of debt to total capitalization has gone down since the end of the year from 53.7% to 52% at the end of the first quarter.

Moving forward to page 12 on the cash flow statement. Two main items moving there up and the cash provided by operating activities is up $15.8 million, primarily result of the insurance proceeds and improved collections in our supply costs during the year. We used that improvement in cash flow to increase our repayments of short-term borrowings almost probably at a similar amount, and so, obviously reducing short-term debt during the quarter. Lastly, I’d say on this page, there were no issuances of our ATM in the first quarter, but we continue to anticipate using up all of our ATM program before the end of 2018.

Moving on to page 13, 13 is adjusted non-GAAP earnings. Those of you who’ve seen the slide many times, what we try to do is look at GAAP earnings on the far left hand side of the page compared to GAAP earnings on the far right side of the page, and then remove those items. And non-recurring items, as we go towards the center of the page, compare non-GAAP 2018 versus non-GAAP 2017 for the quarter.

At the bottom of the page, we had GAAP diluted EPS of $1.18. We removed $0.07 of favorable weather to give us to a $1.11; we compare that to $1.13 on a prior year basis, down $0.02 or .8%.

Looking at the items throughout the P&L. At the top of the page, you see after adjusting out favorable weather in both of -- the two years. We actually show gross margin down $3.7 million or down 1.5%. Again, the deferral is the primary driver there. If in fact you remove the deferral, we would actually had an increase in gross margin on a non-GAAP basis, so positive 1.5%.

Moving down the P&L from operating expense standpoint, continued good cost control. You can see OG&A down 2.3%, but again property tax and depreciation continued to increase total operating expenses up 2.1%. Operating income and pre-tax income down minus 8%, minus 7%, respectively. Improvement in income taxes, as you expect $4.7 million, gets us down to our net income on a non-GAAP to non-GAAP basis of $0.3 million or 0.5% improvement on a year-over-year basis, the primary reason why diluted swings and diluted EPS swings in other way is of course the dilution of additional shares on a year-over-year basis.

Moving to slide 14 on our 2018 earnings guidance. Reaffirming our $3.35 for $3.50 per share, obviously for the remainder of the year and expect to see normal weather. We talk about our tax rate being zero to 5% for the remainder of the year and our diluted share count of 50 million to 50.2 million. Also, I want to point out, expect reasonable treatment in both our Tax Cuts and Jobs Act filings with our three jurisdictions we made filings in thus far and a reasonable recovery inn our PCCAM filing in Montana.

And with that, I will pass it back over to Bob.

[Bob Rowe, President and CEO]

That was a great, Brian. I will touch on few things at a higher level, come back and discuss in several in more detail and anticipate there are improve discussion during the Q&A. First, regulatory items, just following exactly on Brian’s comments. We have the three pending tax reform dockets. We’ve had good discussions with staff at the state level and our focus is on providing a long-term benefit to customers, being able to make some necessary expenditures in the Montana system and keeping investors back really is the bottom-line and ought to be the loadstar in all of these are proceedings.

We are continuing to work through these Power Costs and Credit Adjustment Mechanism in Montana. We’re going to hearings [ph] at the end of May and we are preparing a comprehensive electric general rate case to be filed in Montana by the end of September based of course on a 2017 test year.

As you look at our capital finance, a heavy focus on transition and distribution, building on a great success of our distribution system infrastructure plan and now moving to more of a whole system approach, similar approach on the natural gas transmission side with PHMSA compliance. And then, grid modernization which actually includes both the gas system as well as the electric system as to metering.

We talk frequently about our new stakeholders group, very, very valuable in scoping our DSIP project. Last year, we had successful stakeholder groups in South Dakota within both the electric and gas operations. They provided great guidance. And we think about more open investment in that system. And similarly we have a Montana infrastructure stakeholder group that was really very valuable as we thought about the evolution of our system and our services in Montana. Two big projects in the supply area this year. First, South Dakota will be filing a new South Dakota electric resource plan by the end of the year. A big activity currently is looking at how our fleet and considering situations where for operational and economic reasons, it may make sense to retire and replace specific units. You’ll be hearing more about that over coming quarters and our supply folks have done a job keeping the South Dakota PUC informed of our thinking about all of that.

In Montana, we will be filing our next plan by the end of this year. Montana does have a statute governing the planning process and our goal is a long-term least cost, least risk approach to address overall need and the focus is on intermittent capacity and reserve margin needs. We also work with a stakeholder group, tactical advisory committee to develop the Montana plan. They’ve got several -- more public sessions as well for larger group to -- about the plan and way in.

We continue to look for opportunities obviously to acquire natural gas reserves when it makes sense. And our cost control efforts have been successful and we look at that benchmark into other companies as we think we’re doing a very, very good job.

Just a note, the beautiful photograph is the Black Eagle Power House where the Missouri River heads north through Great Falls, Montana and the hydro system is not static. We’ve talked before, we’ve successfully -- hydro system to integrate a range of resources and really change the way our overall Montana electric system operates. The system also is static and we have opportunities to cost effectively add generation, consistent with current licenses at a number of sites and our supply chain has been [indiscernible] project the year.

Turning in more detail to the regulatory and legal front, first a Montana Property Tax Tracker Filing. And Brian and I both mentioned, we made filings in all three jurisdictions. Montana is by far the largest, simply as a result of the size of our investments in Montana, but also some differences in the tax treatment over the years.

In late January, -- well, actually let’s start with property tax tracker. So, property tax tracker is a major driver in Montana. Montana Commission as you know, has expressed concerns about the size of our tax burden, and we share that concern. The commission went through a rulemaking process last year, we think of it as a minimum filing approach for the property tax tracker, went to hearing, and ultimately issued an order based on our 2017 property tax tracker filing that changed the methodology. And as a result, we were unable to recover an additional $3.5 million that impacted equally both 2017 and 2018. And this, was -- change was result of simply applying an alternate methodology that lowered the allocation to Montana jurisdictional retail customers as opposed to FERC jurisdictional customers. We don’t have a tracking mechanism currently in place on the flip side. We filed mostly for reconsideration and ultimately the commission did grant our motion for reconsideration as to the retroactive application and we sincerely appreciate that action by the commission and consider it to be very constructive.

Turning next to the Power Cost and Credit Adjustment Mechanism. As you know, the 2017 legislature in Montana eliminated the statutory electric tracker and replaced it with commission discretion. The commission had [indiscernible] that change, referenced the tracker currently in place for Montana Dakota utility in this Montana electric operation. We’ve worked through many of the complexities in the early stages of that docket. Ultimately in July, we filed an electric PCCAM proposal that we believe is very much in line with the commission’s advocacy in the legislature. And I think you’re -- general sense familiar with that. in December, the Montana Commission issued a notice with additional issues stating that the range of options identified in the party’s testimony was not sufficient and directed parties to consider alternative risk-sharing features, the possible PCCAM. On February 7th, we filed our additional issue testimony. Intervenor additional issues testimony was filed in March. Our rebuttal is now due from us on April 30th with the discovery underway, and this scheduled to go to hearing beginning on May 31. It is possible the decision will apply to variable costs on a retroactive basis to July 1st of last year which the effective date of the legislative change.

Turning to Dave Gates Generating Station. As you know we received an adverse order from FERC in April 2014. The order concerned cost allocation between retail and wholesale, state and federal jurisdictional customers. Our request for rehearing was denied in 2016 and we were required to -- did make refunds following $3.8 million. We appealed to the U.S. Court of Appeals and received the decision -- a negative decision affirming the FERC decision in March. And we consider that matter now closed.

Turning to Colstrip Unit 4 and the disallowance of replacement power costs. In May 2016, the

2016 the Montana Commission issued a final order disallowing recovery of certain costs associated with the 2013 outage with Colstrip. In September of that year, we appealed the order to Montana District Court arguing the decision was arbitrary and capricious and in violation of state law. We expect the decision on this appeal sometime within the next nine months.

Now, turning to the estimated impact of the Tax Cuts and Jobs Act. As we mentioned, we have filed cases in all three jurisdictions. As Brian we have been -- our proposal was based on a current year methodology making the specific change in the books for this year. We’ve deferred as a result of the $7.3 million of revenue associated with planning to do a regulatory liability account, which would be between $15 million and $20 million for the full year 2018. And that deferral is anticipated to be offset by a similar reduction to income tax expense and should have minimal impact on net income.

At the request of the commissions, we also filed a restated historic calculation. And this essentially goes back to the last rate case and it would serve [ph] the updated tax methodology into that method. In our case, we don’t consider this to be an appropriate adjustment, because again, we would be -- and our shareholders would be harmed as a result of that adjustment. And obviously, it was not the intent of federal tax reform. But if the Montana Commission were to adopt the restated historic calculation, that could result in approximately an $8 million to $12 million additional pretax earnings and cash flow impact. Again, we don’t believe that is an appropriate result, nor a result that could possibly have been intended by congress in passing the act. [Ph]

Utilization of the deferred revenue of the regulatory liability will be determined in the independent dockets and procedural schedules, and not yet been established. As a result of the tax reform, we updated our effective tax rate assumptions included in 2018 guidance to from between zero and 5%, and previously we were at 8% to 12%.

NOLs are now anticipated to be available through 2020, previously of 2021, and we also reduced our deferred tax liability by $320 million as of December 31, 2017. And this reduction was offset in regulatory assets and liabilities. It’s important to note that based on our filling and barring further negative regulatory actions, we believe that our debt coverage ratios will be adequate to maintain existing credit ratings. Negative actions by the regulators could lead to credit downgrades and could necessitate additional equity issue and we do not believe that that would be -- an appropriate result.

Turning to the capital spending forecast before we open it for your questions. What you see is, as we have discussed before, really stable and balanced capital investment by part of the business and by year. Notable updates, we have $123 million of previously included investment in what we believe is very important capacity generation and that’s been removed pending the update of our resource plans in Montana, South Dakota that I described earlier that should be done by the end of this year. And we have added approximately $126 million of investment associated with grid modernization and automated metering infrastructure for Montana. Previously similar expenses were included for South Dakota and Nebraska, and approximately $28 million. So cumulatively, for five-year period, capital spend is almost $1.6 billion. We do anticipate to fund these important investments with the combination of cash flows aided by NOLs through 2020 and the remainder of our current equity distribution program and long-term debt issuances. If significant capital investments that are not included in the above projections or if further negative regulatory actions occur, that could necessitate additional equity issuances.

And with that, we’ll open up for your questions.

[Operator]

[Operator Instructions] And we’ll go first to Michael Weinstein at Credit Suisse.

[Michael Weinstein, Credit Suisse]

Hey. On equity issuances, for the ATM, can you elaborate on why no sales in the first quarter? And do you think the remaining sales of $46 million for the remainder of the year will be evenly spread or will it be backend weighted or frontend weighted in some way?

[Brian Bird, VP and CFO]

Well, I’ll start on the first part of your question. We’re really crazy about our share price in the first quarter. As you know, tax reform has significant impact on our share pricing. And so, we have noted, we would do the full 46 throughout the year and expectations on a going forward basis, is we’ll probably get down with the program, Michael. And I’ll leave it that.

[Michael Weinstein, Credit Suisse]

And if -- you stated that any unfavorable regulatory outcomes might require equity issuances. Do you think that that would just be an expansion of the ATM or block issuances, how are you thinking about that?

[Brian Bird, VP and CFO]

That’s a good question. And we’re still thinking through that, Michael. I think one thing that’s beneficial of the ATM program is we’ve been talking about for some time, any growth above and beyond our capital plan may require equity. And so, having an expanded ATM is certainly helpful in that. And that’s one thing that we think about from an equity perspective. There are some things as Bob pointed out on the generation front that we could be investing some capital. And so there may be needs for equity associated with that. But in addition to that, we’re looking at the remainder of the $46 million in the ATM program from credit rating perspective. But, we have continued impact based upon difficult regulatory decisions and it impacts our cash flows such that our debt [ph] were to go below 15%. We may have to look at utilizing additional equity there and how do we that is yet to be determined. Hopefully, it’s not necessary.

[Michael Weinstein, Credit Suisse]

Just one last question. On the restated historic calculation methodology for income tax, the income tax docket, what is the exact cause of the $8 million to 10 -- or $8 million to $12 million harm that would be created by that? And also, how are both proposals handling prior period deferred tax revenues in terms of how many years they’re going to be amortized out?

[Brian Bird, VP and CFO]

I would say, on the first part of your question, we’ve been experiencing lower tax rates for a number of years, doing a lot of things in the tax front to keep our tax rates down. Our belief in the spirit of the tax reform is whatever your tax rate was this year and after tax reform whatever that tax rate would go to afterwards, we would want to make sure that we would give that benefit to customers, of course grossed up in the revenue line associated with that change. What we are trying to do is make ourselves full from a net income perspective. Having experienced lower tax rates over the years that results in a lower gift back, if you will, to customers. In fact if you go back into previous filings, we may have had higher tax rates in those particular filings. And so, that incremental benefit would be passed on to customers.

The problem with that is one of the reasons we haven’t been coming [ph] at rate cases is because we’ve been experiencing these lower tax rates over years, which has offset the increase in costs that we’ve had throughout our businesses, plus we’ve now even asked for a recovery of the capital investment, if you will for the $400 million we’ve invested in DSIP. So the customers have already benefited from these lower tax rates over the year, not only we’re asking them to double dip, if you will by using the historical test years.

So, what we are trying to do again, in the spirit of tax reform is only give to our customers what they are deserved to receive based upon the change in our current year tax rates.

[Operator]

We will go next to Julien Dumoulin-Smith from Bank of America Merrill Lynch.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

So, just a follow-up on the last point, just to kind of dig that up. Can you elaborate a little bit more on the puts and takes on the CapEx? I suppose the question that I would have on the other side of it is, how do you think about the timeline for approval of AMI and how that -- could that flip here on the Montana piece and could we see some positives and some negatives? Could you kind of walk through a little bit more on that?

[Brian Bird, VP and CFO]

Well, I think you saw the total amount on the capital side associated with that. And I think what we are doing right now is relating with those investments in South Dakota early at the end of ‘18 and into ‘19 and then we will start to ramp up for Montana, if you will in the ‘19 and start ‘20 and ‘21 really into those programs. And the timing of course could vary depending how things move to South Dakota. But that’s our plan as we sit today.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

And then, how do you think about the capital budget here? I mean, let me ask you this. So, the 15% of the debt and the potential income and equity, I suppose there’s few other points that you brought up on the call with respect to cash flows if you could elaborate. First, could you comment on the potential retroactivity, I suppose back to July of PCCAM? And then, separately, can you comment on the potential -- I supposed you’re putting -- and perhaps I don’t want to read too much into, the potential retroactive piece of tax reform with the 8 million to 12 million of additional pre-tax earnings and cash flow impacts that are presumably a reduction, right? So, I just want to understand the timeline of potential equity in light of those two potential decisions as well as the CapEx?

[Brian Bird, VP and CFO]

I think, Julien, it depends a lot there. I think I’ll start with PCCAM. I can’t really gauge how much the impact from a dollar perspective, I could argue the range and PCCAM is pretty large and nebulous at this point. It’s difficult to answer where that will come out, know what the 2017 aspect of that would be. And on tax reform, we pretty much laid out based on those two methods, what the amount would be. I’d put it in the context. We’re going to know within 2018, outcomes on those two cases. And obviously, we’ll also have a rate case the following year with an outcome in 2019. And we’ll have a pretty good idea what our earnings and cash flow will be from that as well. So, we have to look at the short-term impact in 2018, up until the rate case. And also, may have a better understanding what the impact will be from those two filings and the outcomes of those two filings on both our earnings and cash flow and understand how the impact FFO? I don’t know how to explain it other than that, Julien.

[Bob Rowe, President and CEO]

The only addition I would make to that is, we’ve talked about the possible retroactive application of a new PCCAM regime as a result of the additional issues later in the case that’s added quite a lot to the overall timeline. The consumer accounts, at a high level you could characterize the same. We do want obviously -- they do have to take a different track or mechanism but also suggest that the changes to the mechanism be on a going forward basis. And again, most important point I think Brian made was that we’ll know the results whenever those results are during the year and then that will inform our decisions.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Got it. If I can read between the lines, you’re not going to know the outcome for the PCCAM piece as well as the tax reform piece for a little bit of time here. So that might delay any further equity needs for a little bit...

[Brian Bird, VP and CFO]

I would argue this. We’re not issuing any additional equity at all other than what we have to do in the remainder of our ATM program. You know the outcome is one of the two of these regulatory matters.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Right, yes, exactly. That’s what I’m trying to get at. Another point I wanted to bring up real quickly was on the District Court case recently. Can you comment potentially around any read through your potential applicability? I mean, certainly, one could say that that was a win on your side. Is there anything else we should be thinking about in the context of how that court case and the Colstrip case could be applied elsewhere?

[Bob Rowe, President and CEO]

It was significant decision obviously and the court focused on good administrative practice and on due process. We consider and I consider very positive that the Commission has now decided to open proceeding to look due process and how it conducts its proceedings. And we very much welcome it.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

Excellent. And sorry, last quick one if I can squeeze in on the QF side of things. Obviously, we saw you a pursue two projects here. I suppose there was the first -- I think there was a 80-megawatt wind project and the separate 8 megawatts. Can you talk about prospects for additional renewables on a rate base context in light of QF out there? And then, also the context under which you would be able to convert the 80-megawatts into a rate base opportunity perhaps down the line?

[Bob Rowe, President and CEO]

Any significant resource additions are going to be driven by our plan [indiscernible] are opportunistic. This was an opportunistic acquisition that we were able to take in existing resource that our customers are paying for and lowering the cost to customers while at the same time producing an opportunity for shareholders. We need to get through a FERC process before we get to the state process on that side. The other contract you’re referring to was a more of a straight forward QF; that was good news for customers and the terms were extremely favorable. And although we do focus significantly on the applicability of the Commission’s 15-year contract rule to rate base owned resources, you know that the Commission has made very good decisions about QF pricing and related costs for those customers.

[Brian Bird, VP and CFO]

One thing I’d add, Bob, is, the QF of course [indiscernible] is there opportunity as a result of right of first refusals that we build into these contracts. And so as future opportunities arise as a result of that, we evaluate those, how can we make that more cost effective to customers and also help from an rate base perspective. And so things have become -- fall in place to capture these opportunities.

[Operator]

[Operator instructions] And we’ll go next to Jonathan Reeder at Wells Fargo.

[Jonathan Reeder, Wells Fargo]

I just wanted to get I guess a little bit of background. So, what prompted you to present this kind of restated historic calculation methodology, given back the benefits of tax reform? Is this just like out of an abundance of caution or did the MPSC kind of requested this perspective as well?

[Brian Bird, VP and CFO]

No. If we saw in instructions, if you will, a methodology in terms how they would look at this calculation and taking that into consideration, we felt that it was an important for us to not to ignore that calculation from a filing perspective.

[Jonathan Reeder, Wells Fargo]

Okay. So, they wanted to see it from back to restating from basically the last rate order for each applicable I guess kind of business or asset?

[Brian Bird, VP and CFO]

Correct.

[Jonathan Reeder, Wells Fargo]

Okay. And then, regarding DGGS, if I remember correctly, the third quarter is about right $8 million to $9 million of lowering of revenues than you believe were necessary to fully recover the plan at the time. I know, you have been operating the plant differently than originally contemplated, particularly following addition of those gaps or the hydro assets. So, kind of what’s the shortfall now and what’s your strategy for trying to get the full recovery for DGGS going forward? Is it via the upcoming Montana rate case or perhaps even as part of the FERC case, can you kind of talk the strategy there?

[Bob Rowe, President and CEO]

Brian, why don’t you talk about shortfall first.

[Brian Bird, VP and CFO]

Yes, I think the shortfall, you are absolutely correct. Our expectation is, we are viewing that plant differently associated with the hydro and the expectation of the gap, if you will, would be smaller. In order to capture that gap of course we have to do fillings in both jurisdictions, both Montana and FERC, and to capture and demonstrate to both commissions how we’re using that plant differently.

I think the other thing -- Jonathan, to think about it, a lot of time has passed, also on that asset, it’s been -- I will say significantly depreciated but it’s been depreciated quite a bit since we’ve put in service back in ‘11.

[Jonathan Reeder, Wells Fargo]

Sorry, go ahead.

[Bob Rowe, President and CEO]

No, there is still obviously substantial assets on our books, it’s nowhere near fully depreciated but it is significantly depreciated. Key issues between FERC and state rate cases will be allocation between jurisdiction and that will include studies of the costs of integrating resources relatively between the jurisdictions.

[Jonathan Reeder, Wells Fargo]

Okay. So, you don’t have to go completely back to Montana to hopefully bridge that gap; there is still some on the federal side?

[Bob Rowe, President and CEO]

Sure. Yes. That’s correct.

[Operator]

And we’ll go next to Paul Ridzon at KeyBanc.

[Paul Ridzon, KeyBanc]

Just on historical look at tax reform, I mean, this will be fixing the rate case, right?

[Brian Bird, VP and CFO]

Well, it’s an excellent point, Paul. Our view point is if you’re going to do something like that and ask us to go back and do things on historical standpoint, why not wait for the rate case. And the benefit we’re providing here is on the current method as we point out, we’re going to provide the benefit that we’re receiving ‘18, up until customers, up until the time of that rate case. And so, that’s our viewpoint. If you want to go back and historical, let’s just take care of everything in the rate case, but until that time let’s use the method we have displayed.

[Paul Ridzon, KeyBanc]

And then, just on potentially incremental new generation, kind of what’s the potential capital and timeline for seeing that out?

[Bob Rowe, President and CEO]

No. I would really want to push back on assigning number. As we highlighted in the presentation, we removed over $120 million from the capital forecast. Now, we’re deep into new plans in South Dakota and Montana, and we’ve talked about some opportunistic activities. But really, the bulk of any investment is going to be driven by the outcome of the plans.

[Brian Bird, VP and CFO]

And the plan [ph] is expected to be out by end of this year.

[Operator]

[Operator Instructions] And we’ll go back to Julien Dumoulin-Smith, Bank of America.

[Julien Dumoulin-Smith, Bank of America Merrill Lynch]

I just wanted to follow up and clarify the restated historic impact 8 million to 12 million. Is that upside of 2018 earnings guidance or is that already reflected? I just want to make sure we understand this.

[Brian Bird, VP and CFO]

That would be -- what we’re saying in our guidance is we’re utilizing our current method. That $8 million to $12 million of additional pre-tax hit. That’s not including in our guidance. We take into our guidance, utilizing our current year method where net income is stayed whole as a result of tax reform.

[Bob Rowe, President and CEO]

There would be downside pressure on our earnings this year.

[Operator]

And gentlemen, no additional questions at this time. I’ll turn the program back over to you.

[Bob Rowe, President and CEO]

Okay. Thank you for your support and interest throughout the quarter. We’ll be visiting with you at couple of conferences over the coming months or two and hopefully talking to many of you next quarter. Thank you.

[Operator]

And ladies and gentlemen, once again, that does conclude today’s conference. Again, I’d like to thank everyone for joining us today.