NorthWestern Corp

NASDAQ:NWE

Earnings Call Transcript 2022-Q2

[Travis Meyer]

Good afternoon, and thank you for joining NorthWestern Corporation's Financial Results Webcast for the Quarter Ending June 30, 2022. My name is Travis Meyer. I'm the Director of Corporate Finance and Investor Relations Officer from NorthWestern.

Joining us today to walk you through the results and provide an overall update are Bob Rowe, Chief Executive Officer; Brian Bird, President and Chief Operating Officer; and Crystal Lail, Vice President and Chief Financial Officer. All participant lines are currently muted. After the presentation, we have a lot of time for our Q&A session. I’ll provide instructions for asking questions at that time. [Operator Instructions]

NorthWestern's results have been released, and this release is available on our website at northwesternenergy.com. We also released our 10-Q premarket this morning. 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 direct you to the disclosures contained within our SEC filings and the safe harbor provisions included in the second slide of this presentation.

Please also note this presentation includes non-GAAP financial measures. Please see the non-GAAP disclosures, definitions and reconciliations also included in the presentation today. This webcast is being recorded. The archived replay of today’s webcast will be available for one year beginning at 6 p.m. Eastern today and can be found in the Financial Results section of our website.

With that, I'll hand the presentation over to NorthWestern’s CEO, Bob Rowe.

[Bob Rowe, Chief Executive Officer]

Good afternoon and thank you for joining us. The photograph on the cover of the deck you're looking at is taken from the Rimrock's above Billings in Yellowstone County, Montana and that's appropriate because, as you know, we're working very hard to ensure adequate delivery and generating capacity in the Billings area, particularly the Yellowstone County Generating Station, but also other work as well. But in fact, our board meeting is in Kalispell, in Flathead County over in the NorthWestern corner of Montana where we're seeing really exciting growth on the natural gas side as well. Had a great visit with our local team here, Board and employees in our Kalispell, Montana office.

It was particularly nice because yesterday we concluded the last open contract we had and that was with our represented Kalispell employees. So, as a result of that, now we have multi-year labor contracts with all of our represented employees, providing some real stability. And I would say that we all came out of that much more united with a sense of shared purpose.

I'll start off with some highlights, turn it over to Crystal for the financials, and then to Brian for operating results and coming attractions. And then we'll come back and visit just a little bit about the other big news of the day that we're all really very pleased with. Recent highlights, starting off.

Our financial results are in-line with our expectations for the quarter, that includes net income of 29.8 million or $0.54 diluted EPS and non-GAAP EPS of $30.01 or $0.54 diluted EPS per share. Our expected long-term annual EPS growth rate is between 3% and 6% and we're reaffirming our full-year non-GAAP guidance of between $3.20 and $3.40 per diluted share.

Our $582 million capital plan for 2022 remains on track, our folks are doing an excellent job managing our capital work, despite all the challenges that are being thrown at them. In May, we went live with the 58 megawatt Bob Glanzer Generating Station in Huron, Montana, a neat story there is while we were cutting the ribbon, the generating station was called on by SPP at that moment and we had to all go outside and it's been working wonderfully well and typically has been called on by the powerful multiple times every week. So, it's doing just what it was intended to do.

We had really a great employee response in both Montana and South Dakota to some severe weather, probably you all saw the photographs from Yellowstone Park and the Yellowstone River, and you should know that our employees were very much in the middle of every part of that working to restore service in the park, in the communities along the river and really even bigger storms hitting South Dakota two directional storms in particular.

We track major events, but this was the rare catastrophic events and we can find catastrophic as 7x as significant as a major. In both the Montana and the South Dakota events, our employees did a great job. We heard stories of customers just watching in tears really grateful for the work that we're doing. And very importantly, all of that work was done very, very safely.

So, we were doing – our folks were doing just what they were expected to do. In terms of the dividend, our quarterly dividend, of $0.63 per share will be payable on September 30, 2022 for shareholders of record as of September 15.

Crystal, off to you.

[Crystal Lail, Vice President and Chief Financial Officer]

Thank you, Bob. As Bob noted, an operational quarter with some significant events there and then we look at results from a Q2 perspective, you'll see on Slide 4, as Bob mentioned, lower at the net income line by 7.4 million, coming in at 29.8 million of net income or $0.54. The thing I would mention is after adjusting for non-GAAP items, which I'll get into in a little bit more detail here that is actually improvement at the net income line of 30.1 million in Q2 2022 versus 29.2 million in Q2 of 2021 or $0.54 as compared with $0.56.

Turning to Slide 5 to give you a bit more detail on our earnings here. Really solid performance from retail volume. You'll see that on the left side of the page offset by items really favorable in Q2 of 2021. The absence of those is affecting the comparative results here. Also, we had a penalty associated with some CREP litigation, driving unfavorable results.

I would also mention the higher operating and depreciation there in-line with our expectations, and then of course a share dilution based off the equity that we issued in late 2021, all leading to $0.18 lower on a GAAP basis versus 2021. A bit more detail on the margin line at Page 6, down $2 million, primarily again driven by some of those favorable items that occurred in Q2 of 2021, offset by solid customer growth and usage and then weather on the natural gas side.

So, I'll take it from the left side of Page 3. Here, the first column is the adjustment to our liability that we have for other market QF cost. This is my favorite thing. It was my favorite thing when I was an accountant to go through this every year, but last year in Q2 that was 9.2 million favorable to us. This year, 5.1 million favorable, so you'd see a lower impact there negative of 4.1 million.

The next column here is our transmission, electric transmission margins. The thing I would mention there is last year we had the release of 4.7 million of margin related to prior deferred revenues. You removed that and we actually are seeing continuing to see solid transition revenues and a slight improvement over Q2 of 2021, but again, the absence of that $4.7 million favorable in 2021 is impacting the results there.

Moving to our fundamental natural gas and electric volumes for the quarter, you'll see natural gas is favorable really on the backs of cooler April and May, whether they're contributing. And then on the residential side, whether or not quite as favorable on the electric piece, I should say, but solid residential and commercial usage offset a bit by the industrial side. So, margin there together on natural gas and electric volumes 6.7 million favorable.

I would comment that weather was 3 million favorable to us versus normal and 1 million favorable versus the prior period. And again, I would mention that's driven a lot on the natural gas side by cooler weather in April, May that did reverse a bit on us in June. The other thing that I would mention is that we talked in April, we mentioned quite a bit about weather and snowpack conditions and that as Bob started off with has turned dramatically in Q2 with wet weather in Montana, helping our hydro conditions broadly. All of that leading to again $2 million lower in margin driven really by the absence of some favorable items in the prior year or 0.9%.

Moving on to the next slide, Slide 7, operating expenses, you'll see continuing increase or headwinds on the operating side, but consistent with our expectations of the guidance that we laid out for 2022, an increase of 208 million overall for the quarter that falls to the bottom line, driven by higher insurance costs and higher depreciation, but again in-line with our expectations.

Then Slide 8 gives you the GAAP to non-GAAP reconciliation. Again, I would highlight, starting from the left side working in 29.8 million of net income or $0.54 on a GAAP basis. We're adjusting out favorable weather here of 2.2 million and then also adjusting the CREP penalty that we recorded in Q2. The reason I would comment on that, that we are adjusting out that penalty is that related to litigation from prior periods, and legislation that indeed no longer applies to us.

So because it's related to prior periods and legislation is no longer applicable, we've added that back and obviously our weather adjustment is typical, so that gets us to a non-GAAP net income basis of 30.1 million or $0.54 as compared to the prior period. And again Q2 of 2021 impacted by weather, but certainly by QF liability adjustment there is significant. So, after removing those, it's 30.1 million in Q2 of 2022 versus 29.2 million in the prior period.

However, a slight improvement on the net income line, but offset by dilution at the share line, $0.54 there versus $0.56, but does show improvement.

With that, I would move to Slide 9 from a cash flow basis. At Q1, we had talked about solid improvement from a cash flow perspective and that trend has continued into Q2, much of that driven by collecting prior period energy costs both electric and gas, I think Winter Storm Uri [caused, I think] [ph] about the fullness of collection in our Montana PCAM.

Those are favorable, also driven by favorable revenues and strength of that line as well, and also the absence of some refunds that occurred in the prior period here. So, we continue to see strong cash flows here. I would also comment that on the back to some of that in our equity issuance, we were taken off of negative outlook by Moody's during the quarter.

So, with that, I would lead you to Slide 10, and note that, obviously we noted in our press release and Bob noted is the open that we are reaffirming our guidance based off the performance in the first half of the year in-line with our expectations and no changes to this slide as to the items that we expect to impact us in 2022.

And with that, I'll turn it over to Brian.

[Brian Bird, President and Chief Operating Officer]

Thanks, Crystal. On Slide 11, we've shared this slide before in terms of capital investment. First and foremost, over the last five years, we had invested about 1.8 billion or had a 12% CAGR in terms of growth rate over that time period. When we look forward to the next five years, that 1.8 billion increases up to 2.4 billion, and of that 2.4 billion, two-thirds of that are being the T&D side of our business.

I think grid modernization, capacity, those types of things and obviously maintain our existing system, remaining third is really in the generation space and of that, half of that is associated with really the Yellowstone County plant. So, even though that's a significant investment for us from a percentage of our total CapEx over the next five years, it's relatively small.

Last thing I'd say on this slide, as Bob pointed out right upfront we're still on track for our capital plan for 2022 of 582 million. We're doing that in spite of the fact, we're seeing challenges, of course, from a supply chain perspective, we're seeing increasing prices and certainly longer timelines in terms of materials that we receive, but still holding tight in terms of that capital plan and making that happen. Speaking again to the next five years that 2.4 billion of investment, we expect as a result of that we'll see a 4% to 5% annualized rate base growth for the company.

Moving on to Slide 12, really looking forward and because of that significant investment we've made over the last five years matter of fact going back as far as 2015 on the natural gas side and 2017 on the electric side, result of that investment primarily, we're going to need to file an electric and natural gas rate case in Montana. We expect to file that sometime in August, so obviously very, very soon here.

In addition to the investment that we've made, we're trying to reduce regulatory lag and what’s certainly important for us is not only trying to earn closer to our authorized rate of return, but improve our cash flow to support our credit ratings, and enable us to continue invest and compete for capital.

In addition to that, making progress, the 175 megawatt Yellowstone County generating project in Montana, as we’ve mentioned previously, the Bob Glanzer Station, I think 58 megawatt station in South Dakota is up and running. Yellowstone County plant is effectively the same plant just 3x bigger, and our hopes to complete that in advance of the 2023, 2024 winter season, and we've already invested approximately 54 million towards the total investment of 275 million in the plan.

Lastly, a big year for us in terms of resource plans. We expect to file here very shortly in the second half our South Dakota resource plan and then by the end of the year to do the same thing for Montana.

And with that, I'll hand it back over to Bob.

[Bob Rowe, Chief Executive Officer]

Thank you. I never thought of earnings calls as having a cold open, but makes it [sound] [ph] almost fun. Well, when Brian became the President and COO, we talked to you about the company's approach to succession, and we've got obviously a deep bench and some extraordinary leaders. And Brian has been doing a fantastic job for the last year and a half as COO. He spent a lot of time getting out in the field, our employees as well as managers know and respect him, you will see the results of that good work as we continue to talk about our plans over the coming months and into next year.

We are very efficient operation. We're good at execution. And I think we're all extremely excited about what comes ahead. Yesterday, the Board accepted my resignation, both from the Board and as CEO effective at the end of the year, and Brian then will step into the role of CEO. I'd settle along one of the measures of my success or failure would be whether or not eventually my successor would come from inside the company.

Brian, as you all know, is a good friend of mine, has been a mentor when I started with the company and has been a tremendous leader and he will be leading, I think as good an executive senior management team as any in the industry truly. So I'm going to be leaving at the end of the year. I'm still going to care deeply, deeply about this company and you all can – will still have me to [kick around] [ph] paraphrasing, you know who for the rest of the year. And Brian, I guess I'll still have you to [kick around] [ph] for the rest of the year too.

So again, thank you all for your support for the company. Brian, congratulations. And now we'll do our best to avoid your questions.

[Travis Meyer]

Thank you for that, Bob. [Operator Instructions] And it looks like we have a few people in the queue already queued up. We will take our first call from the line of Shar Pourreza.

[Shar Pourreza, Guggenheim Securities]

Here we go. Can you hear me?

[Travis Meyer]

Sure can, Shar.

[Shar Pourreza, Guggenheim Securities]

Alright. There you go. Travis, you're a little technological for me.

[Travis Meyer]

Sorry about that.

[Shar Pourreza, Guggenheim Securities]

Oh, hey, guys. There's been a lot of articles coming out of Talen's bankruptcy proceeding in Houston, which suggest there's now maybe an August 11 deadline for Talen to produce a plan or else the judge would require Talen to commence call strip arbitration. Could you maybe shed some color on one, if what's being kind of written and is actually correct about the arbitration being forced? And two, what sense you may have of whether the other parties have displayed an interest in engaging your arbitration with, let's say, forced to begin next month?

[Bob Rowe, Chief Executive Officer]

I'll say a couple of things that I know Brian is going to want to speak to this. Yes, the Pacific Northwest owners had filed a motion. We filed separately. There's a hearing on the motions on July 12, we were essentially requesting relief from the state, Talen was ordered to submit a proposal addressing specifically whether the plans will operate or close and for how costs will be – and how costs will be borne with respect to any of those alternatives and that will be filed on August 11, and a hearing on August 15.

So, we don't know the specific outcome. Obviously, we would like to be moving towards arbitration. Beyond that, what I would just say and one of the reasons I mentioned the opening slide, this is an incredibly important resource to serve our customers at this time and to maintain grid stability in Billings.

I think as you all know, Governor Gianforte is really committed to seeing Colstrip remain open. We want to work with them, want to work with other parties to find good solutions. So, whether it's inside the arbitration or outside the arbitration, we are quite committed to work into resolutions that let all parties need what they need to do.

[Brian Bird, President and Chief Operating Officer]

I think the other thing I would just say is, you know, all parties in Colstrip are unhappy with this uncertainty. Obviously, for utilities to move forward, we need a time period from a planning perspective. And so not knowing the outcome on Colstrip is difficult on all parties. And so, there are discussions that are happening and hopefully we will resolve this, as Bob says, either within or outside of arbitration at some point in the near future. And so, our job is to continue to provide the services Bob pointed out, not just to the Billings area, but to our total system and that resource continues to be a great resource for us, and we're working extremely hard to make sure it stays in place for some time in the future.

[Shar Pourreza, Guggenheim Securities]

Got it. And where does the [21] [ph] securitization legislation stand, I guess, in terms of the PSC adopting and kind of formalizing [it into rules] [ph]? So, if you were to need it sooner or rather than later, let's say, for Colstrip, do you expect it would be available?

[Bob Rowe, Chief Executive Officer]

Yes. We've really – we've followed the rulemaking, the commission has in fact moved ahead with that as you note, but our focus at this point really is on continuing to operate. And even in terms of meeting our net zero goals, we need that resource available while other resources become cost effective. Brian?

[Brian Bird, President and Chief Operating Officer]

Good Bob.

[Shar Pourreza, Guggenheim Securities]

Got it. No. That's all the questions I had. Bob, Brian, seriously, congrats on Phase 2. And Bob, I just have a real important question for you, is do you think Brian's actually going to start buying the beers now that he's been promoted?

[Brian Bird, President and Chief Operating Officer]

That'd be a hard no.

[Shar Pourreza, Guggenheim Securities]

See you guys.

[Travis Meyer]

Thanks a lot, Shar. We'll take our next call from Ryan Greenwald of Bank of America. Ryan, your line should be open.

[Ryan Greenwald, Bank of America]

Hey, can you hear me now?

[Travis Meyer]

Yeah.

[Ryan Greenwald, Bank of America]

And Bob, Brian, warm congratulations to both of you.

[Bob Rowe, Chief Executive Officer]

Thank you.

[Brian Bird, President and Chief Operating Officer]

Thank you, sir.

[Ryan Greenwald, Bank of America]

Appreciate all the updates here. As we think about the upcoming August filing, how should we kind of think about the magnitude of the revenue adds that we should be expecting?

[Bob Rowe, Chief Executive Officer]

Crystal?

[Crystal Lail, Vice President and Chief Financial Officer]

Ryan, I think we might have even talked about this one before, and obviously, we can't give too much information until we do file, and then we'll have lots to talk about, but we have a slide in the appendix that gives you a view on rate base. I think it's 39. I'm being given an assist on that shows you a bit of where we ended the year, it is an electric and natural gas filing. So, the thing I would say is, we have a lot of investment that's serving customers that we need to go in and earn on.

[Ryan Greenwald, Bank of America]

Got you. I mean, it seems like a pretty complex filing overall. Any initial thoughts on what could be more contentious based on initial conversations with staff and the commission ahead of the filing?

[Crystal Lail, Vice President and Chief Financial Officer]

I would just say, we've been having, I think, very productive conversations with both staff and the commission. They obviously know we plan to file. One of the things that we talk talked about last year was the PCAM and where market prices have went there. So, they've already seen, I'll call it, a preview of that filing since we filed it last year.

So, that'll be a [piece] [ph] to the rate case. So, they know and expect that. They obviously know the amount of investment we've been putting into the system. And, you know, we make annual filings with the MPSC where they see details of some of those things as well. So, when you say, you know what you think will contentious, I just think, to your point there is a lot of things in there.

We've been out since 2015 on the gas side, 2017 on the electric side, and regulation is complicated, but I think lots of things in there for the commission and staff to review and take hold of, but at the basis, it's just coming in asking for recovery of our costs. And what really is already serving customers. So hopefully, we'll work our way through it.

[Bob Rowe, Chief Executive Officer]

I would unpack it in three ways. First, the flow through costs, particularly supply costs, those arguably could have been handled separately, but that's significant. Should be quite straightforward. Second piece, just exactly as Crystal mentioned, bringing forward rate base. There's a significant gap between what we've invested that is reflected in rate base and our actual rate base on both the gas and the electric side. That's primarily just basic infrastructure to serve our Montana customers that's extremely important. And that just has all the elements of a rate case.

The third bucket would be some policy proposals that had to just better align how regulation would be done in Montana with the ability to make those investments and there's nothing you will see there that is really out of the mainstream in terms of what many, many other states are doing.

Last comment is the team that is working on the case is just exceptionally professional. So, it's going to be a very high quality filing with contributions from folks all across the company.

[Ryan Greenwald, Bank of America]

Great. Appreciate that. And then maybe just lastly, with respect to the outstanding litigation around the air quality permit, can you talk a bit about your confidence there in reaching constructive outcome and potential scenarios if things don't really go your way?

[Bob Rowe, Chief Executive Officer]

Yes. It's too early to say what the outcome actually will be, but the question goes to litigation in a state and district court in Billings challenging the DEQs granting a permit and arguing that climate effects ought to have been, in fact, climate effects outside the borders of the State of Montana ought to have been considered in the Department of Environmental Quality's process.

So, parties are going to be making their post hearing filings this Friday. Obviously, we will and then we'll see what the judge does. If the case is remanded then the department will have to follow whatever instructions the court provides or review and appeal. The interesting thing is this is litigation brought under a provision of the Montana constitution that provides both the right to a clean and helpful environment. And we certainly in our environmental programs, I think are a big part of that stewardship, but in the same sentence, also ensures the right to pursue your living and livelihood.

I'm paraphrasing. And you can't really have one without the other. So, the consequences of an adverse district court decision here would be really pretty profound on the Montana economy overall, not just on one facility located in Billings, located in your Billings.

[Ryan Greenwald, Bank of America]

Great. I will leave it there. Thank you again. And Bob, Brian congratulations again to both of you.

[Bob Rowe, Chief Executive Officer]

Thank you.

[Brian Bird, President and Chief Operating Officer]

Thanks Ryan.

[Travis Meyer]

Thanks Ryan. Well, it's not a full-fledged Elvis sighting, we do have an Ellinghaus sighting. Chris Ellinghaus from Siebert Williams Shank has the next question.

[Bob Rowe, Chief Executive Officer]

It’s Chris who taught Elvis’ moves, I’m sure.

[Chris Ellinghaus, Siebert Williams Shank]

I beg your pardon. Congratulations, Bob and Brian. We'll really be sorry to see you go, Bob.

[Bob Rowe, Chief Executive Officer]

Thank you.

[Chris Ellinghaus, Siebert Williams Shank]

Mostly because [Brian's coming] [ph]. Can you give us a little bit of color what you're seeing on regional capacity issues?

[Bob Rowe, Chief Executive Officer]

A couple of comments. It continues to be an extremely challenging market. And I'm answering more in terms of the west, although in [SPP] [ph], there are some pretty big concerns too. Yes, it's a challenging tight market. And our customers are more, as you know, more exposed than any. And that will be reflected among other things in the supply costs that we put in front of the commission as part of the PCAM, but at the same time, there's an awful lot of very good work being done on regional market approaches.

The Board spent quite a lot of time this morning talking about the balance market and the data head market, what's happening with [indiscernible], what's happening with the Western Power Pool? So, there's a lot of work being done. We are participating in that long-term. I think there are some good outcomes there. But the near-term is still pretty hairy for us. So, we've already talked on this call about the Yellowstone County plant and we talked about Colstrip. We need those resources. We need other resources on a contract basis until we're through the next Montana supply plan and moving on to implementation there.

So, near term, what I would say, the last thing I would say is that the warnings that we and others have been sounding for a number of years were right on target. I wish we were several years ahead of where we are in closing that gap. Brian?

[Brian Bird, President and Chief Operating Officer]

Yes. Bob, thanks. I would add, I think, within the state, we've demonstrated on a slide for you our ability to help close that capacity gap on the supply side, but everything has to kind of happen within that slide it would be helpful to us. And by the way, a lot of that are short-term measures. And so, on a long-term basis, we still have a sufficient gap that we need to close on the supply side and obviously traction on our existing projects. And that is Slide 37, by the way.

Attraction on existing projects certainly makes sense, but we're going to need to make more investment within the state to control our needs, if you will, from a supply perspective. And Bob’s primarily chatting about the supply side. In addition to that, we have capacity constraints on both the gas and electric transmission side of our business and we certainly have upward pressure on investment needed there to address that.

Montana continues to grow and as it continues to grow, it is eating into our [late capacity] [ph] associated with both electric and gas transmission. And so, we're going to have to help Montana grow by being able to provide sufficient capacity going forward. So, there's investment needed there as well.

[Bob Rowe, Chief Executive Officer]

And then if you turn over to South Dakota, partly just as an example of the Bob Glanzer Station is being called on quite actively by SPP, that's to the benefit of our customers. So, as you move into a market and take advantage of a market, you need to have resources to be able to do that. The other notable thing in SPP is they have raised their reserve requirement to 15%. Brian, what's our reserve in Montana?

[Brian Bird, President and Chief Operating Officer]

Well, it was minus 46 at one point in time and obviously we closed that in a short-term basis, but we still have a lot of work to do to climb out from that negative reserve margin perspective.

[Chris Ellinghaus, Siebert Williams Shank]

Bob, I wanted to ask you, is Glanzer being dispatched more or less or, you know, sort of on your expectations at this point?

[Bob Rowe, Chief Executive Officer]

I'd say on or possibly even more, but certainly on.

[Brian Bird, President and Chief Operating Officer]

Actually, Bob, I would say, a bit more. I mean, I know we knew it would be draw upon, but how much is a little bit higher than we expected right on the blocks.

[Chris Ellinghaus, Siebert Williams Shank]

Okay, great. Crystal, you mentioned hydro conditions. Can you give us a little bit more color on, you know, how the precipitations affected you recently?

[Bob Rowe, Chief Executive Officer]

I'll jump in on that actually since I was on-site when the river was cresting. We had three to four feet of – here's a good example. Three to four feet of snow fell at big sky after the lift closed in April. That turned into too much of a good thing. So, we went from being quite concerned about snowpack at one point in the year to being full pond, all up and down in the Missouri River.

So, you do have a slide in the appendix that shows both weather and hydro conditions. That's lots of blue across the basins. You've heard us say this before, but one of the things we like is that we pay attention to snowpack and tree basins and you can see some real variation in snowpack from basin-to-basin. That's a little bit of risk mitigation just built into the Montana hydro system.

[Chris Ellinghaus, Siebert Williams Shank]

Okay, great. One last question. Crystal…

[Brian Bird, President and Chief Operating Officer]

Just one thing, I would just add from hydro condition basis, obviously, going back to full pool from a hydro perspective, I think the capacities provided by hydro this year should be better than we certainly saw last year. So, that's helpful to us. And secondly, Montana was in sufficient drought conditions throughout the state in the first quarter when you looked at maps for Montana. That's changed dramatically. And though we still expect to have a fire season, of course, in Montana, but we’re feeling a much better position this year than we were at this time last year.

[Chris Ellinghaus, Siebert Williams Shank]

Okay, great. Crystal, question about the adjustments for the quarter, what's your thought process about not excluding the QF year-over-year?

[Crystal Lail, Vice President and Chief Financial Officer]

Certainly, Chris. And I think the key piece of that is that QF liability is [indiscernible] giving, but there's different pieces of that. So, there's a couple of pieces to that, which is each year we have an adjustment to the actual, so obviously, the model has an expectation, so you have actual output and pricing. So, that's something that we leave in each year.

[Travis Meyer]

Crystal, can I just interrupt quick? Slide 25, Chris, maybe it's something to look at in the appendix as Crystal is talking about this.

[Crystal Lail, Vice President and Chief Financial Officer]

Yes. Travis has done a nice graphic for you to show you exactly when we've adjusted it out, when we've left it in, and what the pieces are? So, the first piece is you have your annual adjustments for that piece of it, and then there's also a piece that we adjust then the expectation of the model to future escalation for variability and pricing there. And then the third piece, which is what we adjusted out last year, was an adjustment to the end of a contract term.

So, we have left in the first two pieces that I just referred to on an annual period, we do typically adjust those during second quarter. The adjustment last year, which was unique in the sense of when the contract term ended for one of the contracts within the model. We did adjust out as a non-GAAP item. So, we try be thoughtful about that. I think also if you go back in time, we had previously adjusted that periodically.

So, you wouldn't have seen adjustment from us on an annual basis. Once we went to that, we've kind of left those numbers in and left them [fall through] [ph].

[Chris Ellinghaus, Siebert Williams Shank]

Okay. Very clear. Alright. Thank you very much. Appreciate it, guys. Congratulations.

[Bob Rowe, Chief Executive Officer]

Thank you.

[Brian Bird, President and Chief Operating Officer]

Thanks, Chris.

[Crystal Lail, Vice President and Chief Financial Officer]

Thanks, Chris.

[Travis Meyer]

Take our next call from Sophie Karp at KeyBanc.

[Sophie Karp, KeyBanc]

Hello? Can you guys hear me?

[Travis Meyer]

We can hear you, Sophie.

[Sophie Karp, KeyBanc]

Great. Bob and Brian, congratulations to both of you and Bob you will be missed for sure.

[Bob Rowe, Chief Executive Officer]

Thank you very much.

[Brian Bird, President and Chief Operating Officer]

Thanks, Sophie.

[Sophie Karp, KeyBanc]

We're not at letting you off the hook yet, right? You're still around for the rest of the year. So, my question is about the inflation bill, I guess, that we call it now, which is the energy bill effectively, right. It appears, I'm not sure how much you guys have dug into it yet, but it appears that it makes the carveout for an extra tax credit for [Technical Difficulty] is located in what they define as energy community, which appears that a brownfield from a [coal side] [ph] would qualify for that, right? And that's [just me reading it] [ph]. I wonder if you have given it to read and how you think about that as it might apply to Colstrip and that would affect your thinking about your position herein anyway?

[Bob Rowe, Chief Executive Officer]

We're actually looking forward to doing that. You're right. There are brownfield related provisions. We've set up internally with the infrastructure bill, a pretty good process of identifying where we should focus, how we gather information whether or not we might participate. My expectation is because those folks are already up and running and doing a great job. We would just fold this bill if, when and if it passes into that process.

[Sophie Karp, KeyBanc]

Alright. And if you could maybe discuss a little bit, your joining the Western Market Exploratory Group. I understand that you [joined] [ph] and how do you see this group evolving over time and you're all there?

[Bob Rowe, Chief Executive Officer]

Well, there are a number of different organizations active in the West. In fact, you can fill up a slide, I think we did fill up a slide identifying all of those. So, there's [indiscernible] with the [imbalance market] [ph], the head market. The other important initiative that we've been talking about all along is what had been in the Northwest Power Pool and that was the Western Power Pool. They are leading the resource adequacy effort. We think that's incredibly important for multiple reasons in terms of understanding what resources exist in the region, evaluating them with a common set of metrics and then identifying strategies.

So, those are two major efforts. In addition to that, Southwest Power Pool, which is a contractor effectively for the Western Power Pool also has its market initiatives. And there are a couple of other groups who are having conversations around what would a governance structure look like?

How should we be thinking about transmission in the West. We're a pretty small shop on the far eastern edge of the Western interconnect, but we're participating in as many of those as we can and we're contributing. What I would say is that the West has not been successful and the government has not been successful in posing a top down market structure. Where we have been successful is, very collaboratively working with one another on specific strategies that are in all of our interest. And I think that's the spirit in which so much work is getting done.

[Sophie Karp, KeyBanc]

Do you think we're going to see a [Western RTO] [ph] in our lifetime or is that a bridge too far?

[Bob Rowe, Chief Executive Officer]

Well, if you're a transmission planner, you might ask, is the line I'm working on going to get built in my lifetime, and there's a lot of hard work to be done there. I don't know if it will be a full formal RTO, but I absolutely do believe that the Western market is going to continue to evolve and get more organized.

You might have to break that down into pieces. Will it be entirely West wide, will it be North on the one-hand, South on the other, will it be coastal and interior, but the good news is, people are talking and working together and there really is a good culture in the West and the Northwest working together to get things done to make sense for your system and for your customers.

[Sophie Karp, KeyBanc]

Alright. Thank you so much.

[Travis Meyer]

Thanks, Sophie. Take our next call from Anthony Crowdell at Mizuho.

[Anthony Crowdell, Mizuho]

Hey, good afternoon. Congratulations, Brian. Congratulations, Bob.

[Bob Rowe, Chief Executive Officer]

Thank you.

[Brian Bird, President and Chief Operating Officer]

Thanks, Anthony.

[Anthony Crowdell, Mizuho]

I just have two questions. One of them is on the pending rate filing or the rate filing in August and I'm not trying to run the filing, so I understand if you don't want to answer the question. But if I just think about some of the – I don't know if policy is the right word, but maybe some of the mechanisms that you would like change, you know, we potential for decoupling, maybe PKM. You have the Yellowstone plant under construction right now, maybe testing some known and measurable in a rate proceeding. Just your thoughts on, are you approaching this rate filing by maybe trying to fix one or all of those issues or, like, how are you thinking about this rate filing?

[Bob Rowe, Chief Executive Officer]

I'll just say that was a pretty good list you laid out. Crystal, do you think you want to add to that?

[Crystal Lail, Vice President and Chief Financial Officer]

I think Bob is an expert at answering these questions, but I think you laid out a decent summary of all the things we're thinking about and approaching this case in mind with.

[Anthony Crowdell, Mizuho]

I guess then, if I can take another crack at it then, is the thought of maybe doing one each filing if you're going to have filing this year, maybe a filing next year for Yellowstone or the company is still thinking about, do you do, you know, that list in this one filing?

[Bob Rowe, Chief Executive Officer]

Well, our filing will include a set of proposals to modernize and we can make more efficient the overall regulatory system. Then we just have to see what parties and what the commission ultimately do with that. So, we really won't even know their initial views until we start to see discovery. And then we are going to be very interested as we always are in having discussions with the parties to see, to answer questions, to see where we can agree to narrow disagreements, things like that. But that's just a standard part of the process.

[Anthony Crowdell, Mizuho]

Great. And then – and just lastly on Yellowstone, I know you had one on the slide, but I forgot the amount – the number, expenditures so far year to date. How are you earning on that right now? Are you booking that as non-cash AFUDC?

[Crystal Lail, Vice President and Chief Financial Officer]

Right. Non-cash AFUDC is correct.

[Anthony Crowdell, Mizuho]

Great. Thanks so much. Again, congratulations and looking forward to the invite for the going away party.

[Bob Rowe, Chief Executive Officer]

Thank you.

[Brian Bird, President and Chief Operating Officer]

Thanks, Anthony.

[Bob Rowe, Chief Executive Officer]

Maybe Brian will buy that round. We'll see.

[Travis Meyer]

And with that, we've exhausted our queue, so I'll hand it back to you, Bob.

[Bob Rowe, Chief Executive Officer]

I guess we've exhausted the analysts. Well, again, thank you for your support and we really do look forward to visiting again in October and at various conferences and don’t let Brian get out of the [indiscernible].

[Travis Meyer]

Thanks everybody.

[Bob Rowe, Chief Executive Officer]

Take care.