NorthWestern Corp

NASDAQ:NWE

Earnings Call Transcript 2022-Q3

[Travis Meyer]

Good afternoon, and thank you for joining NorthWestern Corporation's Financial Results Webcast for the Quarter Ending September 30, 2022. My name is Travis Meyer. I'm the Director of Corporate Finance and Investor Relations Officer for 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 the release is available on our website at northwesternenergy.com. We also released our 10-Q pre-market this morning. Please note that this company's press release, this presentation and 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 on 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. The 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 it over -- our presentation over for one last time to NorthWestern’s CEO, Bob Rowe.

[Bob Rowe, CEO]

Thank you very much, Travis. We're meeting this week in Sioux Falls, South Dakota. There's some great economic development activities over the weekend, and we're just delighted to be part of one of the most dynamic economies in the country, highlight of the board meeting was a presentation by PUC Chair, Chris Nelson and Chair Nelson reminded us of our responsibility to focus on the reliability of our system. And Chair Nelson is very, very clearly focused as are his colleagues on reliability and affordability. It's a message that he also delivered very eloquently at the ribbon cutting for the Bob Glanzer Generating Station. So we were really honored and appreciated the teammate’s time for us.

And wanted to say a couple of things about the ongoing renewal of our leadership both the board and the executive level. At the board level, as probably most of you know, Kent Larson is a new member of our Board of Directors. Many of you probably know Kent. He was a key leader at Xcel until his retirement and one of the key contributors to Xcel's growth -- sustainable growth over a number of years. So Kent is already providing great contributions to the Board of Directors.

At the executive team our General Counsel, who also leads our Regulatory Affairs efforts, Heather Grahame has announced her retirement in early January along with me. And Heather will be among other things pursuing her passion for Triathlon where she is world franked. Heather’s been a great leader for the company, key in all of our legal regulatory compliance works and also a key contributor to our corporate strategy. Because Heather is as good as she is. We will be elevating two people to take her place Shannon Heim coming in as General Counsel. And Shannon and Fang becoming Vice President for Regulation.

In addition, Curt Pohl, our Vice President for distribution has already moved into a new position focused on business development. And Jason Merkel has taken over the role of Distribution Vice President. So Brian is going to be leading a great team with veterans and some new faces, that very much aligned with the direction that Brian and the board and the executive team will be taking the company over the next few years.

Turning to financial results. Net income was -- for the quarter was $27.4 million, $0.47 a diluted EPS. Non-GAAP EPS was $24.3 million, $0.42 diluted EPS. Our expected long term EPS growth rate is 3% to 6% off a 2020 base. As you know, we filed a Montana rate review on August 8. This was seven months into the year as opposed to the nine months cadence that we are typically on. Very impressively the Montana Public Service Commission issued an interim order on October 1.

So basically, two months after the filing was a unanimous order based on a staff recommendation. The order will significantly mitigate that regulatory lag and under recovery of our purchased power cost and we will certainly reinforce our credit metrics. And then that will also provide the retroactive date for a final order, couple of other notable items in the rate case, that Brian's going to come back and talk to this in much more detail.

First of all, some key procedural steps. The Commission has issued a procedural order, and we're past the period during which the application could be deemed inadequate, which could have triggered a refiling or modification to the filing. We're doing some, I think, interesting and very constructive things in this case, including Brian kicked-off the filing process with a very well attended webinar, Cyndee Fang will be leading a series of technical discussions on key points.

The case is obviously driven by recovering our substantial investments in capital electric and gas infrastructure since our last filings cost recovery of flow through costs and then a set of about four important policy proposals. Again Brian is going to be providing you more detail on that. But we're very, very pleased to be where we are right now and appreciate the professionalism of the Montana Commission and Staff.

We filed our South Dakota Integrated Resource Plan on September 6. Look forward to implementation of the actions under that plan. We are on track for our $582 million capital plan for this year and the board has voted a $0.63 per share dividend payable on December 30 of this year.

So first, I will turn it over to Crystal, and then Crystal will hand it off to Brian.

[Crystal Lail, VP & CFO]

Thank you, Bob. I'll speak to Slide 4 and discuss a bit further details of our financial results and then hand it over to Brian here. So for the third quarter of 2022, you'll see net income of $27.4 million. As Bob said that's $0.47 on a diluted EPS basis and that compares with third quarter of 2021. Net income of $35.2 million or $0.68 on a diluted basis.

Slide 5 lays out a bit of the significant drivers of that performance for the quarter with the bridge from the $0.68 for the quarter and on a GAAP basis in 2021 to $0.47 on a GAAP basis or $0.42 on a non-GAAP basis in 2022. With that, you'll see utility margin $3.2 million or $0.05 after tax of detriment there in a quarter where we had favorable weather. I'll speak to that in a little bit more detail on the next slide.

The next few problems you'll see are the impacts of our operating costs, which are in line with our expectations for the year. When we laid out our guidance for the year, we talked about sustainable operating cost structure. Certainly, we're seeing pressures there, but in line with our expectations and manageable, so you'll see $0.06 on those items or $4.1 million on a pretax basis.

The next column you'll see is interest rate pressures, which I think everyone's experiencing, a $0.03 of impact to the quarter from that perspective and then of course dilution from the share counts of the equity issuance that we announced and transacted last year in November on a forward basis, the impact of that dilution this year funding the amount of investment capital as Bob mentioned, on track for another record year capital investment in 2022. And then on a GAAP basis, $0.47 you'll see adjusted. We're reducing $0.05 on a non-GAAP basis driven by weather.

Utility margin is detailed on Slide 6 and a bit more detail on that Q3 margin impact. Overall a $3.2 million detriment when you consider that versus prior period and what impacts net income from a utility margin standpoint. First impact there is transmission margin seeing lower revenue, both driven by lower formula rate there and also so volumes that is in line with what we expected to see on the transmission side.

But importantly, a bit outside of what we expected to see is the next column, which is your PCCAM impacts. As a reminder, that's the supply cost mechanism where we recover our costs in our Montana jurisdiction and you will see that that's $1.3 million versus the prior period. But importantly, $4.25 million (ph) of negative impact on an absolute basis. We certainly saw higher market prices overall, but certainly price peaking (ph), I think at the end of August, early September, we saw over a $1,000 megawatt hour prices on the market to deliver to our customers. And we see that -- when we see that sort of exposure certainly provides headwinds for us at the margin line basis.

I would also mention on the electric retail volumes, $2.1 million of favorable there. And while that's certainly a solid performance at that piece, you'll see that we show favorable weather of $4.2 million versus normal for the quarter. So that's what we're backing out on a non-GAAP basis. So when you only see $2.1 million a favorable versus the prior we would expect to see a bit better performance there. The retail volume line and certainly including commercial loads.

We're seeing lower commercial volumes for the quarter on 2% customer growth and a bit of warmer weather. So a bit of headwinds there and how we're seeing the commercial load shape up for Q3, all that leading to $224.1 million of utility margin falling to net income and again that's $3.2 million lower than the prior period.

Slide 7 shows you the look of our GAAP to non-GAAP adjustments. So for Q3, the only non-GAAP adjustment we have is weather. And again, I just spoke to the impacts there but $27.4 million on a GAAP basis, adjusting out $4.2 million of favorable weather versus normal or $3.1 million on an after tax basis resulting in $24.3 million on a non-GAAP earnings basis and that compares with $33.6 million in the prior quarter.

And again, you'll see the prior quarter, we had very warm weather in Q3 of 2022 broadly across our service territory, but we also had very warm weather in Q3 of ‘21. So you see $4.2 million pretax favorable weather we've adjusted now versus $3.4 million in the prior period.

With that, I would move you to cash flows and impacts there on Slide 8. While operating cash flows show significant improvement of $87.7 million from the prior year year-to-date. You'll see that FFO actually decreased by $15.6 million. That's definitely driven by the lower net income. The other thing I would mention there is that while we are collecting significant costs from the prior period, I think the Winter Storm Uri gas costs that are still coming through and significant amount of PCCAM under collection from prior period that we are collecting currently.

You also see the significant impacts this year of continued high market electric supply cost. And then what we're seeing is higher cost to fill storage in the off season and higher natural gas prices all of that is impacting cash flows here in the near term and certainly we'll be rolling through and impacting on customer bills and how we think about that in the future.

So with that, I'll transition a bit to expectations for closing out the quarter and looking to the full year ‘22 results on Slide 9. We are narrowing our guidance range. As you all know, we started with the guidance range of $3.20 to $3.40 or $0.20 range and we are narrowing that to $0.15 range of $3.20 to $3.35. While results in the quarter certainly were lower than we expected, they were impacted by headwinds at the high level of market supply pricing in Montana.

Certainly, that PCCAM impact that I mentioned and talking about utility margin for the quarter, it's a gift that keeps on giving because while it also impacts us at the margin line, it also drives higher unrecovered supply costs with pressure on our revolver balance. And of course, then ultimately the interest rates on that and then also timing of the draw on our forward equity.

So with that, I will say what offsets that a bit is, and the most significant item for the quarter other than this being Bob's last earnings call for you all to ask in very intriguing and interesting questions would be that we filed our rate review in Montana obviously that's critical to how we think about the growth of the business going forward and resetting to a reasonable cost structure and recovering the amount of investment that serving customers currently. The MPSC, as Bob mentioned, held a substantive work session and authorized interim rates for both the base rates fees and PCCAM. Thus, you'll see our updated guidance assumptions here looking to reflect those impacts.

And with that, I will turn it over to Brian.

[Brian Bird, President & COO]

Thanks, Crystal. On Page 10, we speak to capital investment. Historically, over the last five years, we invested $1.7 billion as you can see from under $300 million in 2017 to over $400 million in 2021. That's a compounded annual growth rate of 12%. ’22 was -- you saw even a much larger capital plan primarily as we continue to build up Yellowstone County.

We have a $582 million capital plan and that does remain on track. You may recall some time ago at the beginning of, I'd say, the supply chain crisis and rising cost, we suggested that our plan is likely to come on track due to two variables. One, we do expect higher costs, but you also expected some delays in projects. And we definitely have seen both during the year, but net-net our plan remains on track.

In essence of that $2.4 billion that we're looking to invest over the next five years including in 2022, a substantial amount of that is for our delivery business, like, T&D to think to modernize the grid in an increased capacity. And also on the supply side, we obviously continue to invest in capacity, but also resources to integrate continued renewables added into our business. This sustainable level of CapEx is expected to drive an annualized rate base growth of approximately 4% to 5%. And the best way we think about it from financing all of this capital spend is really to achieve a 14% to 15% FFO to debt at the end of the year. So capital continues to grow at the company and we need to invest in critical resources on a going forward basis.

And when that occurs on Slide 11, periodically, you need to come in for a rate case. In Montana, it's been sometime 2015 since the last gas case from a test year perspective in 2017 since the last time from the electric perspective. And during that time, we've invested over a $1 billion in both combined electric and gas business in Montana. And 49% of this rate cases is the recovery of the cost of capital and depreciation of that over $1 billion investment.

42% of the request for both the total electric and natural gas increase is driven by flow through costs, including the market power purchases and property taxes. And even with the increases here that we would acknowledge it's a pretty big increase for both electric and gas customers, but it's been a long time coming for many, many years even with those increases they will be in line with inflation over that time period since we've last filed a rate case.

Moving forward on Page 12, as Bob mentioned earlier in the call, in late September, we received approval effective October 1, perhaps interim rates to go into effect. And again, acknowledge the good work by the commission to acknowledge our issue of not having sufficient cash flow to manage our business and the importance of an interim rate. That interim rate allowed us to collect base electric rates of $29.4 million improve where we stand from a PCCAM perspective by $61.1 million and then base natural gas rates of $1.7 million.

In terms of what we ask for and what we receive, we're pretty happy with we received approximately 80% of the interim request on the electric side, approximately 60% on the gas side. And equally important is in terms of a good outcome there is that October 1, once final rates are approved, that will be the retroactive date or the effective date of an outcome from a final rate case. So that's very, very helpful.

From a procedural schedule standpoint, the next key date is 12/19, I guess, early Christmas present or receiving Intervenor testimony. And then into early March, we'll have our rebuttal testimony and cross-intervenor testimony. And then in early April, the hearing will actually commence.

Moving to Slide 13. On the supply side of our business and looking forward, we continue in our construction at Yellowstone County. That construction began back in April of this year. We've invested just under $100 million to date of the $275 million project and our current schedule anticipates commercial operation. during 2024.

And from a resource plan perspective, we've already filed our South Dakota plan. We filed that in September of 2022 and it identifies 43 megawatts from a retire and replace candidates with the potential for a competitive solicitation during the ‘23, ‘24 time period. And in Montana, we expect to file by the end of the year our IRP, if you will, to be followed by an all source competitive solicitation request for capacity available in the latest 2026.

And last thing I just say on this page is up upper right, we are so pleased that not only to get the Bob Glanzer Station built and on time, on budget and in advance of the supply chain issues and rising costs. But more importantly of that is the plant has been dispatched even more than our expectations. So it's added capacity 24/7 power that offsets the intermittency doing, it’s exactly what it should do to help us move forward with our needs from a supply perspective.

And lastly, it's my pleasure and honor to acknowledge Bob and I will do that on behalf of the executive team and the more than 1,500 employees at this company. To acknowledge, I'd be remiss not to acknowledge during his tenure what he has helped this company achieve. And under his watch through the investment critical energy infrastructure dedicated to serve our customers, we've tripled the size of this business and the value of this business. He's done that through his leadership.

We've invested more than $1 billion in clean energy resources that put us approximately 60% of our electricity provided is carbon free and certainly it's better than industry average. That $1 billion of energy resources primarily that was our 456 megawatt Montana hydro system. And I can't imagine how we'd be serving our customers today if we didn't own those resources, plus 131 megawatts of owned wind in our total system and also three gas plants that were critical to provide the 24/7 reliability that we need to serve our customers.

In addition to that, I guess I'd add, in addition to that, it's also reduced the customers -- our customers exposure to volatile regional energy markets that we participate in every day. We also invested during his tenure here over $1 billion in our T&D infrastructure to modernize it and increase the reliability and the flexibility of that system. Bob was having us do that long before people were talking about hardening their systems.

But I'd also add from my perspective is, our safety culture when Bob arrived wasn't as good as it should have been. And during his tenure, it's improved vastly. And we're sending our employees home just the way they came in the morning, and we're happy to see that our safety has improved vastly under his leadership and the tone at the top he said. And speaking of tone of the top, I think the most important thing Bob's done in this company has set a culture of high integrity and respect in a family like environment.

And with that, I’ll pass it to Bob.

[Bob Rowe, CEO]

Brian, thank you very much. I can't imagine anyone I would have rather worked with than you or this entire group of people, but I will reserve my rebuttal until after we deflect questions. Thank you, Brian. Questions?

[Travis Meyer]

[Operator Instructions] We will take our first question from the line of Shar Pourreza at Guggenheim. Shar, can you hear us?

[Shar Pourreza, Guggenheim Securities]

Can you hear me, guys?

[Travis Meyer]

Yeah. For sure, we can.

[Unidentified Company Representative]

All right. Travis, you're getting way too technological here.

[Shar Pourreza, Guggenheim Securities]

Guys, I mean, just on as we're thinking about next year. I mean, obviously, you're not issuing ’23 guidance right now, but I think it would be helpful. Maybe just give us a sense on the ’22 headwinds you just highlighted in your prepared remarks as we look to bridge into ‘23, like the lower usage, interest rates, PCCAM recovery. I guess, is the GRC enough to offset sort of these ‘22 impacts as we look into next year or could we see some drag with these items into ‘23? Thanks.

[Crystal Lail, VP & CFO]

Shar, it's Crystal. A couple of things with that regard. So one, the GRC is a huge driver when you think about the impact of PCCAM on the quarter. And as I said, it has multiple impacts in our financial statements. Resetting that base and getting something that we can actually work with, I think, is critical to how we think about our performance going forward and that not being a brag. It certainly has caused under earning for us in the past and is something that we're working with the commission on resetting and moving forward on.

So I would say that's certainly a key piece of how the GRC will impact us. And broadly, it's us and everybody else in inflationary cost environment and we'll have to manage that. But I would see strong growth. We've talked about, the need to take this year as a reset essentially and investing for the future in the sense of the equity that we issued. So still driving a net income increase this year.

But your question is, while we continue to grow the business and absolutely and I think the biggest platform to that is certainly getting back to earning our returns from a Montana basis and the GRC is the most critical piece to that, and I couldn't probably understate the importance, overstate. That's what I'm looking for -- of getting that rate review filed, bringing that investment in front of the commission and moving forward quickly with interim rates as we talked about and getting to a reasonable outcome there.

[Shar Pourreza, Guggenheim Securities]

Got it. So you don't, just with some of the moving pieces, you don't -- depending on where rates shake out, and we shouldn't assume the reset can continue into a ‘23. That's the key takeaway I guess there.

[Crystal Lail, VP & CFO]

Yeah. I would just say it this way. Us and everybody else will be dealing with the interest rate pressure. So I don't think that's going to be determinative between us and others, and we'll manage that along with the out from the rate review. But certainly, what I would expect to see and what we talked about from a ‘22 guidance is taking this year to get a solid rate case filed that gives us sustainable amount of cost captured there and the platform from growth off of that.

[Shar Pourreza, Guggenheim Securities]

Got it. Okay. That's helpful. And then how should we sort of think about potential outcomes of the appeal you have right now that's in front of the, the Supreme Court, Montana Supreme Court regarding the preapproval law. Is there a scenario where they could retroactively be applied to Laurel? Or how would winning the appeal impacts sort of your plans going forward?

[Bob Rowe, CEO]

As you recall, we decided not to use preapproval for the Yellowstone Station because we were concerned to get the plant in service as quickly as possible and to move ahead with construction before we got caught on the wrong side of the inflationary environment and supply chain challenges. So the Supreme Court decision one way or the other will have no effect on that particular resource.

I'll go beyond that to say that as you -- I'm sure recall, we had also identified 50 megawatt battery project out of the RFP. That was going to be a purchase power arrangements. We had used -- we had proceeded with a preapproval application for that based on the district court decision in validating the statute. The commission closed that docket and unfortunately, that project is not going ahead.

[Shar Pourreza, Guggenheim Securities]

Got it. Great. And then just one last one. Just on Colstrip, I mean, obviously, your preference is for sort of fast ramping generation like the RICE units. But at the same time, like, obviously, we've seen some major cost increases versus the plan that, for instance, let's to Aberdeen getting canceled last year. If you were to acquire more of Colstrip than is currently planned, I guess, how would the cost of that capacity compare versus what you're seeing in the market right now for new builds? Thank you.

[Brian Bird, President & COO]

That's a hypothetical question, I assume you're asking there. And we continue to lean heavily on Colstrip, it's a valuable resource to us and will be for some time. Obviously, depending with that cost of acquiring that resource. I would tell you our biggest use for that capacity is on that peak day, of course, when we're seeing increased demand and higher prices, Colstrip would be extremely helpful to us, and I’d acknowledging even more of it than we currently have would be helpful.

[Shar Pourreza, Guggenheim Securities]

Got it. Okay. Great. Thanks, guys. I appreciate it.

[Brian Bird, President & COO]

Thank you.

[Bob Rowe, CEO]

Thanks, Shar.

[Travis Meyer]

We will take our second call from the line that ends in 4377-914 area code. Your microphone should be unmuted. All right. We're going to skip that one and maybe if you want to get back in the queue. We will take our next call from Sophie Karp at KeyBanc.

[Sophie Karp, KeyBanc]

Hi.

[Travis Meyer]

Hey, Sophie. There we got you.

[Sophie Karp, KeyBanc]

Good afternoon. Finally, I got how the system works. Thanks for taking my question. So I was just curious to hear your thoughts on how you could incorporate, I guess, a Colstrip situation in your Montana IRP, right? So is this -- would you need a resolution of that one way or the other before you can move forward with the process or would that be a scenario analysis in the IRP that could contemplate various outcomes? So any color would be appreciated.

[Bob Rowe, CEO]

Yeah. I think the only scenarios associated with Colstrip is here are closure dates. I mean, we don't have full control over when these units shut down at this point in time with our 30% interest in Unit 4. Obviously, we'd like to have the plan open as long as we -- as long as our depreciable period in essence to provide service to our customers, but we also acknowledge that there's a possibility that it could shut down sooner. And so we'll likely to have scenarios showing at least one alternative date from a shutdown perspective.

[Sophie Karp, KeyBanc]

Okay. All right. And then maybe on the kind of looking into 2023, right, and the follow-up on the line of thinking that Shar was asking you. So you've sort of narrowed or tightened your guidance for 2022 even though you got the interim rates due to all of the offsetting factors that you've listed. Do you expect those headwinds to persist or abate, I guess, going into 2023 as you contemplate, the outcome of the rate case here. Like, how much of an, I guess, a drag would that be to the new rates impact? How should we think about it?

[Crystal Lail, VP & CFO]

Sophie, it's Crystal again. And what I would just point you too is as we walk through the narrowing of our guidance and I alluded to the multiple impacts of PCCAM being both the 10% sharing, and what we've seen from a $4 million to the quarter on just a [indiscernible] impact there. Also driving, we filed our annual tracker, but I shouldn't use the word tracker. We filed our annual (ph) PCCAM filing.

It's not a tracker. And that showed over $50 million of deferred costs on our balance sheet that I'll remind you there's no carrying costs for that mechanism currently and rates and obviously, as you know, cost of capital used to be almost free. It isn't anymore. And so we're seeing those headwinds and then, that causes us to pull down that forward a little sooner.

All that being said to say a reset in the PCCAM base as we have proposed that has multiple elements to both the design, et cetera. That GRC proposal would help alleviate that multi factor implications of that PCCAM as its impacting our headwinds today. So I would tell you the GRC is critical to offsetting what equals lagging our returns.

[Sophie Karp, KeyBanc]

All right. Thank you. So that's all for me.

[Bob Rowe, CEO]

Thanks, Sophie.

[Travis Meyer]

It does look like the line of 4377 has unmuted now, so we'll try that one again.

[Unidentified Participant]

Yeah.

[Travis Meyer]

There you go. We got it.

[Unidentified Participant]

Is this working? All right. Sweet. There we go. We're figuring it out one day at a time here. Excellent, guys. Thank you very much. I mean, if I could ask just a little bit the inverse of the questions in the last couple, how do you guys think about O&M? Just operating a budget in place and going into ‘23? Anyway to think about that and put some context to it and get you guys early in the earnings season. So I just wanted to hear how you guys are kind of tackling that conversation and also looking at offsets here given that rate case won't be a full year in terms of offsetting the headwinds?

[Bob Rowe, CEO]

Hey, Julian (ph). First of all, before Crystal answers, you don't -- you can actually put your name in there somewhere. We take your question and even regardless – just your number, just so you know that but I'm happy to kind -- I'm happy to pass it on to Crystal Lail.

[Crystal Lail, VP & CFO]

So, Julian, a bit of your question on operating costs, I'll walk you back to when we laid out our ‘22 bridge, one of the things that we said when, I would have to say this, improvement in the net income line, but impacts of dilution driving our lower earnings from this year was a sustainable amount of cost. So I will certainly tell you that there's headwinds there, but they're manageable. You see $0.06 for the quarter, certainly manageable and in line with what our expectations are.

And as we get to ‘23, part of your question is for us and everybody else is some of this latent inflation and price impacts that I think haven't flowed through that we'll be continuing to manage, but I certainly think the way the operating costs are today, we're able to do that. The other thing I would just highlight and I think you guys know this, but we benchmarked very well already on an O&M basis. It's part of the case we're making in our GRC that we manage the business efficiently. We'll continue to do so.

But my other side of that is I don't think we have materially large cuts to be made there in the sense of how you manage other impacts. But again, the operating costs, you see impacts for the quarter in line with our expectation. And that piece of our -- as we've narrowed guidance range, you'll see we didn't adjust any of the operating cost assumptions.

[Bob Rowe, CEO]

Just a little footnote to your question. The rates that come out of the case, whether it's up arrow, down arrow, or side arrow, or retroactive to October 1. Again, that was one of the several reasons that getting the interim implemented as efficiently as the commission was able to do is valuable.

[Crystal Lail, VP & CFO]

Yeah. And I think -- so the other way of saying that, Julien is, well, we do give you ‘23 guidance, the key piece there is our new rates will have been in effect for the whole year.

[Unidentified Participant]

Got it. Excellent. Well, thank you again. And if I can bring it back forward real time. Can we talk a little bit about the transmission outcoming, I mean, I would have thought that things would have been a little bit better just given the volumes and the volatility in the quarter in the power markets. And then related, can you talk a bit more about the commercial volumes and what your expectations are going forward? I saw the commentary in the release on third quarter, what does that hold for fourth quarter versus plan? And then more importantly, again, as you think about ‘23, I know we're all asking for the same thing, but if you guys don't mind on both of those pieces?

[Bob Rowe, CEO]

One thing we've seen, obviously just talk about Montana, for example, certainly a growth in new connects overall, including commercial, but it really doesn't seem that a lot of the commercial sector is back to fully staff businesses. So at least part of what's going on seems to be the continued challenges in the labor market.

[Crystal Lail, VP & CFO]

Sure. So I'll divide your question into two pieces of we're not giving ‘23 guidance to tell you more about ‘22. So on the transmission side, your question was a good one, which is, hey, last year prices were high, markets were volatile, you had really great transmission revenues and margin impact there. This year that's $4.7 million lower and we've set in line with our expectation. The piece I would tell you about our formula rate there is there is a credit for short term sales and so part of what we knew is that rate would come down a bit even though they're solid rate base growth. So that's part of its both price and volume. So I would think about it largely in the sense of maybe around half price driving that $4.7 million in the quarter.

And then the other half being we did see slightly less volumes so demand to transmit over our lines and there's a whole lot of things that go into that. You'll recall last year there were some super dry conditions I don't think quite as bad this year. So all of that, we watched that market closely. But again, that decline was something we did have an expectation. For your question on the commercial side and I would just point you to if you look at our 10-Q and the commercial volumes and things that will pop out to you as really warm weather both last year and this year. This year even warmer and more customer count.

So we've seen solid commercial growth, but you'll see a slight decline in volumes. So that's the piece of you would think on a 2% customer growth above that, warmer weather that you would see volume throughput there, which obviously we're in a, as Bob always says, a fixed price world and a volumetric revenue world, so or fixed cost world and so when we see that sort of piece there, over 86,000 customers, so they're not homogenous. But one of the things that Bob alluded to there is that, you have certainly continued to see labor and staffing challenges with a lot of those businesses.

All that being said to say, one quarter does not make a trend. So while we're watching that carefully and certainly we'll be talking about that at Q4. We continue to see strong, broadly commercial loads, and we'll update you on that next quarter and how we're thinking about it.

[Unidentified Participant]

Excellent. Well, thank you team and Bob, best of luck. It's been a real pleasure.

[Bob Rowe, CEO]

Thank you. You as well.

[Travis Meyer]

Thanks, Julian.

[Unidentified Participant]

Cheers. Take care.

[Travis Meyer]

And with that, we've exhausted our queues. So, Bob?

[Bob Rowe, CEO]

Okay. Well, we will get to see a number of you either in the mosh pit at EEI or maybe in New York in December. As soon as Brian was finished with his urology (ph) and that was -- not everybody gets to be alive when they -- when their urology (ph) is red. So I really appreciate that. And it was even better than open gasket. But anyway, Brian, went to grab a box of tissues, and it's not unusual after we finish these meetings that we need a box of tissues, but I really, really appreciate it.

So Heather is going to be biking, swimming, and running off into the sunset in January, and I'll be hopefully pursuing a number of other things, including particularly just spending more time with my wife. Name of those tissues? What I would say is, the last not quite 14.5 years have just been an incredible privilege to work with the very best group of people, become who good, good friends, doing the most important work in places that are really, really special. So I've been incredibly lucky and I've enjoyed getting to know a number of you and visit with you about the industry and trends and try to help answer all of your really interesting probing questions.

So, again, it's been a real privilege for me, and thanks to all of you for your long term support of this very, very special company. Back to you, Travis.

[Travis Meyer]

Thank you for joining us, and that brings our webcast to a pause. Thank you.