NorthWestern Corp

NASDAQ:NWE

Earnings Call Transcript 2020-Q4

[Travis Meyer, Director, IR & Corporate Finance]

Good afternoon, and thank you for joining NorthWestern Corporation's financial results webcast for the year ending December 31, 2020. My name is Travis Meyer. I'm the Director of Corporate Finance and Investor Relations for NorthWestern Energy. Joining us on the call today to walk you through the results are Bob Rowe, President and Chief Executive Officer; and Brian Bird, Chief Financial Officer.

As most of you are aware, on Tuesday, this week announced several key leadership changes. So we also have incoming CFO, Crystal Lail, currently the Vice President and Chief Accounting Officer for NorthWestern, joining the fun today. Crystal has been with NorthWestern for over 18 years and has played a huge role in shaping the company into the great organization it is today. Brian is handing out some big shoes to fill, but those of us who know Crystal have no doubt she'll bust the toes out of those loafers. Just to be clear, that was a testament to our abnormal talent, not her very normal shoe size. [Operator Instructions].

With that, I'll turn over to the formalities. NorthWestern's results have been released, and the release is available on our website at northwesternenergy.com. We also released our 10-K premarket this morning.

Please note that this 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 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 included in the materials.

This webcast is being recorded. The archived replay of today's webcast will be available for 1 year beginning at 6:00 p.m. Eastern today and can be found on our website at northwesternenergy.com under the Our Company, Investor Relations, Presentations and Webcast link. With that, I'll hand the presentation over to NorthWestern CEO, Bob Rowe.

[Robert Rowe, President, CEO & Director]

Thank you very much, Travis. Well, everyone, thank you for joining us. Wherever you are, I hope it's a lot warmer than it is in South Dakota or Montana, where the temperatures have been well below 0, and we're pretty well locked into a multi-day cold period, but it's February. So what do you expect?

I do want to start by thanking and congratulating both Brian and Crystal. Brian and I have been working together -- in fact, he gave me this factoid, the executive co-morbidity index. If you add up his tenure and my tenure, we are at a total of 30 years. The industry average for the CFO and CEO is closer to 8. So Crystal and I will be starting over and resetting the clock. As you already know, Brian is a tremendous leader of the company. Several of you know Crystal, and she will do a great job. Brian is moving into a new position that we haven't previously had, and it's an important position. I would think about both these changes as well as some others as an indication of a healthy company that does good succession planning and looks out long term as to its people, just as we do to our infrastructure. So this is a change that the entire Executive team and the Board is really very enthusiastic about. Crystal, my advice to you, following up on Travis' comment, is when Brian hands you that pair of Keds, handle them delicately and wash them before you even think about putting them on.

With that, let me turn to the highlights. Net income for 2020 was $155.2 million. It's almost $47 million or 23% less as compared to the same period in 2019. Diluted EPS was $3.06, and that's $0.92 or 23% worse than 2019. On the other hand, non-GAAP adjusted EPS was $3.35, which is within our guidance range of $3.30 to $3.45, and this is $0.07 or 2% lower than in 2019. The Board of Directors declared a quarterly dividend of $0.62 per share, which is a 3.3% increase payable on 31st March to shareholders of record as March 15.

I'm very proud that despite COVID, despite all the challenges that were thrown at us working in very, very different ways last year, we had the best safety record ever. And that was while having the busiest year on the capital front ever. We've talked about our capital plans, of course, every quarter. We've had a very successful year in terms of investing back in the system and doing it safely and doing it while keeping our employees healthy. Specifically, our recordable incident rate was down from 1.86 in 2019 to only 1.36 in 2020. And our lost time rate went from 0.58 in '19 to 0.39 in 2020. And obviously, that translates into more people doing more work, but fundamentally, it translates into more people going home safely every day. So we're very proud of that. And we had a great year in terms of customer satisfaction to -- our customers saw what our employees were doing in the community, saw what the company was doing in the community. That was really recognized and appreciated.

We've been talking about the competitive solicitation process in Montana for -- it seems like a very long time. We are reviewing the independent administrators' analysis, and we expect to announce the selection of multiple projects during the first quarter. And we do anticipate that at least one of our projects will be among those selected resulting in owned capacity generation investment in Montana in excess of $200 million over the next 3 years, assuming we do receive approval from the Montana Public Service Commission. We'll be coming back and talking about some of these in much more detail.

Now Brian, off to you for your victory lap.

[Brian Bird, CFO]

Thanks, Bob. I wish it wasn't a COVID year for my victory lap. But with that, Bob talked about the financial outcomes in 2020, and net income was down on a GAAP basis, down $46.9 million or approximately 23%. You can look to that approximately $47 million negative variance all in the gross margin line. Up at the top of Page 4, you see gross margins down about $47 million or 5%. And when you think below on the P&L, we did a nice job in terms of managing expenses. As a matter of fact, operating expenses are down, and that, combined with favorable AFUDC in the other income line were offset pretty much entirely by increased interest expense and a lower tax benefit in 2020. So we had a lot to do to overcome a difficult gross margin year.

And on Page 5, we speak to that gross margin down to $47 million, as I mentioned, about 5%. That was pretty consistent, down 5%, both for electric and gas. And as we described to the bottom of that page, it was really -- I break it down and really into 5 buckets, if you will. Electric and gas were certainly impacted by unfavorable weather. And then secondly, I'd say COVID impacted that. Those 2, of course, were partly offset by customer growth. We also had a poor outcome. Our disallowance on our PCCAM, that's approximately $9 million. The first 2 I talked about were approximately $22 million in total.

Below that, I really love together the 3 things. We had a -- we did have a QF gain in 2020, but it was lower than the prior year. We did have -- in 2019, we had a decent supply cost recovery primarily as a result of dealing with the debt ban. So on a year-over-year basis, that was a negative item. And then we had lower transmission revenues this year primarily from units 1 and 2 being down this year. Those 3 things combined together for approximately $9 million. And then lastly, we did have a big other here. And as we've mentioned on previous calls, we had some favorable items in other in '19 and unfavorable in '20. These are primarily dealing with closed-out trackers. But on a year-over-year basis, that was a $9 million swing. The total of all of those things is approximately $48.5 million. We did get $1 million back, I guess, in terms of gross margin when you net it out, those items that impact gross margin that are offset elsewhere in the P&L for a net decrease in gross margin of $47.4 million.

Weather on Page 6 was a big driver. We estimate overall unfavorable weather in 2020 resulted in $9.8 million pretax detriment as compared to normal and a $17.1 million detriment as compared to 2019. And when you look at heating degree days, for instance, at the top of the page, it was certainly warmer than normal. And again, the historic average and quite a bit warmer than last year. We did get some help from a cooling degree day, primarily in South Dakota, but I think you all know that's a smaller part of our business. And so we didn't as much bang for our buck, if you will, in the third quarter for that.

And lastly, on this page. In the first quarter and the fourth quarter, we like to see a lot of blue. Unfortunately, in 2020, we saw a lot of red or orange color, if you will. It's much, much warmer. Just to give you a bit of hint for 2021, you're going to see a little -- quite a bit of orange, I think, in January, and you're going to see quite a bit of blue in February. So, so far, February has been very, very cold, as Bob pointed out earlier on the call.

Moving forward, on Page 7, in terms of operating expenses, this company, and we talked about this on earlier calls. Whatever we did see in a shortfall in margin, we would be managing our expenses to make sure that we did hit our revised guidance and did a nice job. Operating expenses were down $6.8 million or down 1%. The biggest driver was a reduction in OG&A over $20 million or down 6.6%, and we saw about -- still saw a 4% increase in property taxes and depreciation and depletion.

On the OG&A, the biggest driver is employee benefits, think medical, but a good portion of that were certainly lower incentive for the company during 2020. Had lower labor costs of about $4 million. Think of just Bob talked about, our biggest year from a capital investment standpoint, certainly allocating more labor to capital. Hazard tree removal, we did such a great job in '19 really getting after that. We had less dollars in 2020. And then as you know, just less travel and other costs that you'd expect to see during a COVID year. We certainly took advantage of that as well.

One area where we did see increased cost was on the uncollectible accounts. Even though we did get COVID relief, if you will, from the South Dakota Commission, we did not from the Montana Commission, and that cost us a $3 million increase in that particular item. Net-net, the change was down $22.7 million in OG&A for those items impact net income. Again, we had some things that impact OG&A but are offset elsewhere in the P&L. Those totaled $1.6 million for, again, a net decrease in OG&A of $21.1 million. Mentioned the increases in property taxes and depreciation. Obviously, plant additions are the biggest driver there and on property taxes, changes in property valuations as well.

Moving forward to Slide 8. Just operating income down $40.7 million, about 15%. Interest expense, slightly up from higher borrowings. Other income, up from higher -- net-net, really from higher AFUDC, and think of the build-out and you're seeing in South Dakota from a generation perspective driving that to a great degree. That nets to pretax being down about $38 million or nearly 21%. And then below that, we had a lower tax benefit than the prior year, and I'll speak to that in a minute. And again, as we pointed out earlier in the call, net income down $46.9 million.

So moving on to taxes on Slide 9. At the bottom of the page, you see the income tax benefit in 2020 was $11 million compared to $19.9 million benefit in 2019, so a reduction in benefit of $8.9 million. That was driven -- you can see as you move up the page, about halfway up the page, the biggest driver there was in 2019, the release of an unrecognized tax benefit of $22.8 million. That was partially offset by really 3 items. Think of lower pretax income resulting in lower federal income taxes, the $8 million you see there; and lower state income taxes to $2.7 million. And then I'd argue just with the increased capital work, we also had higher capital that qualified for tax repairs. That increase of $4.1 million helped offset last year's big benefit, again, a net reduction in benefit of $8.9 million.

Moving on to the balance sheet. I think all I'd say, I really focus on the capitalization really at the bottom of the page. We're definitely up in short-term and long-term debt. In 2020, we did delay equity needs that we had in 2020, and we'll talk about that on kind of 2021 moving forward. And as a result of that delay, really, our debt-to-cap did go up from 52% up to 53.5%, but still certainly within our targeted range of 50% to 55%.

Moving on to the cash flow statement on Page 11. Cash flow from operations are up about $55 million. That's primarily due to better supply collections this year. And then also in 2019, you may recall, we had TCJA refunds. We also had some generation interconnection refunds. That big improvement, that was over $100 million. Those 3 changes, that's reduced by the reduction in net income we talked about earlier, resulting in a net increase, if you will, in cash from operating activities about $55 million.

Bob talked about a big year from cash and investing activities. You can see that approximately a $90 million increase there and just higher investment. And we expect it to be at this higher level of investment and hopefully even higher when we speak to generation in '21. And then at the bottom of the page, cash provided by financing activity, certainly, higher debt was a driver there.

Moving forward on Page 12. We had a slide in here just on taxes. I just want to point out, we are using up NOLs, and we do expect those NOLs to carry over into 2021 and -- but because of PTCs and other tax credits that we have, we don't expect to be a cash taxpayer until 2024. And also I want to point out, as we'll say elsewhere, that we expect effective tax rate to kind of hover around 0%, either minus 2.5 to up to 2.5 range on ETR on pretax income. And then over time, we expect that ETR to gradually increase until the time we get to 2025, somewhere in that 10% to 12%.

Moving forward on adjusted non-GAAP earnings on Slide 13. First of all, I should point out what were the things that were non-GAAP-ed out, if you will. We did add back unfavorable weather this year. We did add back the PCCAM disallowance. In '19's results, we added -- we actually removed favorable weather, and we removed the unrecognized tax benefit. As a result of that, in 2020, our $3.06 diluted EPS increased by $0.29 to $3.35. And we compared that to $3.42. That's again adjusting the 2019 GAAP of $3.98 for those items I mentioned, down to $3.42. The difference between $3.35 and $3.42, $0.07 or down 2% on a year-over-year basis, non-GAAP.

If you look at kind of how we compare those non-GAAP items through the P&L itself, gross margin at the top of the page, down about $21 million and you look at it on a non-GAAP basis, I think half of that really being COVID. You could also see, though, that from an OG&A perspective, we offset that gross margin detriment really an OG&A reduction of 22.8, but we certainly couldn't do enough to cover the increase in property taxes and depreciation. We did manage to do, I think as we've pointed out, a good job in terms of increasing other income and a decent tax benefit, again, when you look on a non-GAAP basis year-over-year. But net-net, we got back to still falling short about $3.9 million or, again, 2% detriment on a year-over-year basis.

Slide 14, in terms of forecasting load itself, we did all right on the residential side, but we're still seeing commercial and industrial lag a bit. Those seems like -- they seem like quite a bit of difference, if you will, from a volumetric perspective. I'll grant that to you.

But if you move on to the next page, Page 15, and focus on the impact of the fourth quarter from a COVID perspective, it was rather flat for us. We saw a similar detriment in gross margin than we saw in the second and third quarter, in the fourth quarter. But the recovery that we did see in uncollectible accounts, we were able to collect from customers for a period of time before we entered into winter rules and, again, continued reduction in labor and travel and others. And net-net, that we really just kind of flattened out to really a minimal loss to -- or effective, I'd just say, 0, if you will, for the fourth quarter. But for the full year basis, we did see a total $8 million to $11 million detriment in gross margin. Total operating expenses were down 2.4. But in that number was, again, an increase in uncollectible accounts that had we got an accounting order, we would have actually reduced that to 0 as well. But even with that as a backdrop, a little bit different interest expense and better taxes just to calculate what we would have seen on a GAAP basis. And an after tax, we saw a loss about, I would argue, $5 million to $7 million or $0.09 to $0.14 is associated with COVID.

Back to the $3 million uncollectible accounts. I think we have been saying all along, if we didn't get an accounting order from the Montana Commission, it would be about $0.05. That $3 million is approximately $0.05. And instead of being at the bottom half of our earnings guidance and our revised guidance, we would have been in the top half, if we have been able to achieve that.

Last thing I'd say, Bob referenced this up front. I think when you consider a lot of concerns about COVID and how it could impact our capital spend, impact our supply chain, the company operated extremely well. Bob mentioned safety, but to deliver the biggest capital spend we had and really pull that off this year, it gives us a lot of confidence going into 2021 with even an increased level of capital spend. So I feel good about the operations of the company at this point in time.

Moving on to 16. The 2020 non-GAAP to the 2021 EPS bridge, starting with the $3.35. We range it low to high up to $3.40 to $3.60. I'd acknowledge that, that's a pretty wide range. And some of you have picked up, we'd like to tighten that, but we want to follow how things are going on COVID in 2021. One thing I should point out in the bridge itself, there's a big leap in gross margin there, $0.39 to $0.54, had really kind of put that into 3 different buckets. And I'd argue that there are about 1/3, 1/3, 1/3. And first, I think organic growth is being that first 1/3. I think second third would be a partial COVID recovery. I think commercial, industrial, and I would argue, some transmission get back as well. During the year. And the last 1/3 is tracker. As you guys know, property taxes are going to be going up, and we're going to get recovery of those property -- a portion of those property tax increases in margin. And I think also there's -- was a drag, if you will, on other in 2020 that we don't expect in '21, and that would be part of that last 1/3, if you will, along with the increases from property tax trackers.

We do have our assumptions that go into our 2021 guidance at the bottom of the page. Of course, you know these well, normal weather. We do expect COVID is going to be with us through the second quarter and expect to see more normalized look in the second half of the year. We have a consolidated income tax rate, as I mentioned earlier, minus 2.5 to positive 2.5; and then diluted average shares ranging 51.5 to 51.8.

I want to focus on that last one for a second. I think there's maybe been some concerns about announcing a $200 million 3-year ATM program. Obviously, going from our share count where we sit today to this range, we're not planning on issuing $200 million of equity in 2021. That is a 3-year look. I'd also remind folks that we did not issue equity in 2020, and we had discussions with the rating agencies in light of where our price was, and we have seen some rebound in our price. We do expect to be issuing equity in 2021, and some of that snowplowed from '20 and some, of course, with our needs. But the -- I want to reiterate, the $200 million is over a 3- year period.

Last thing I'd just say on equity, and I know Bob will see it in the slide here and coming up as well, if, in fact, we're fortunate enough to win in the RFP and make an investment there after a pre-approval, we're going to need to raise equity for that as well. Anything associated with that Montana generation is not built into our numbers, either our capital or our equity and debt needs at this point in time.

So with that, I'll go to my last slide, Slide 17. We have diluted EPS at the top of the page. And even with -- obviously, 2020, had a reduction in GAAP and non-GAAP earnings. Even with that, the average growth rate over this time period was 4.3%. I'd also point out that the midpoint of our 2021 guidance versus our year-end '20, non-GAAP is a 4.5% increase. So that's in line, if you will, with kind of the average we've seen over this time period. I'd also say that regarding the dividend itself, the -- I'd say the projected $0.08 increase for a full year in dividend is a 3.3% increase. I would grant you that, that's quite a bit less than the 6.7% you've seen on an average growth rate. But I'd also tell you that it's our expectation that we're going to grow that dividend in line with our earnings growth rate on a going-forward basis.

And I guess that would lead me to the red box at the bottom of this page. We do expect to see a 4% to 5% growth in rate base, a 3% to 6% EPS growth over the long term. And one thing I'd say about that, as we've said before, at this higher level of capital spend that we're currently seeing, we expect to -- as we get recovery of that investment through rates, we expect to see ourselves in the middle of that range. And again, if we're so fortunate to see some success in the Montana RFP, we'd expect to be in the high end, again, upon getting recovery or a preapproval, if you will, as we make those investments.

Last thing I'd say on this page is we want to maintain that 60% to 70% dividend payout, and I think that's one of the reasons you saw a certain -- well, it's a huge reason is why you saw a lower increase in the dividend than you have in the past but still a strong dividend, up $0.08. I want to make sure that we stay within that range on a going-forward basis and expect that we will as we continue to grow the earnings of the company.

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

[Robert Rowe, President, CEO & Director]

I picture, Brian, dropping the mic right there. Brian, it's been great working with you as CFO over these last 12.5 years or so, and I'm looking forward very much to working with you as COO.

Just to show you how seriously Brian is taking his new role, he's now driving a large pickup truck appropriate to his new position. And as you get to know Crystal, you will find out that she is much more inclined towards jeeps and classic pickup trucks than she is towards those exotic German sports cars that most CFOs drive.

I think the last quarter, I talked about how much we were all looking forward to 2021 in terms of the opportunities ahead of us. I would say that speaking for myself, but I think really for the whole Executive team and the Board, we are more enthusiastic, optimistic about our ability to do good work for our customers than has been the case in quite some time. And that is reflected, among other things, in the amount of capital work that we have planned for this year. We told you in our last call that our total capital forecast 5 years is $2.1 billion. And as Brian mentioned, we expect to finance this with a combination of cash from operations, first mortgage bonds, equity issuances through a 3-year, as Brian said, ATM program.

Financing, obviously, subject to change, depending on capital expenditures, regulatory outcomes, internal cash generation and other factors. The plan that we depict does include significant and important generation projects in South Dakota. As we've talked about there, we were really able to move from filing our plan to consulting with the commission to making the investments very efficiently. And we have a project underway at Aberdeen and even further along here on, but the capital forecast here is really spread across all aspects of our business. Just as an example, we successfully commenced operation of our AMI system in South Dakota. This week, we had a great kickoff of the AMI team in Montana. That's going to be a substantial investment and operational opportunity over the next 3.5 or so years. And again, we're looking forward to moving ahead on that.

The 5-year plan does not include incremental generation in Montana that might come out of the RFP. We do have ongoing investments in the hydro system as we continue to optimize the -- that great asset for Montana.

So just to press rewind for a minute on the Montana RFP, last February, going into COVID, we did undertake a competitive solicitation for up to 280 megawatts. And as I've described, the solicitation was in 3 tiers, long duration, 20 hours, intermediate 10 and short 5 bids were pivoted on behalf of a wide variety of generating facilities in excess of 200 megawatts. And we do expect that at least one of our projects will be among those selected, and that should result in additional own generation capacity in excess of an additional $200 million. Again, that is not included in the plan. That would be an investment over a 3- year period, assuming that we do receive approval from the Montana Commission through the statutory preapproval process that's available in Montana. And then again, we've continued on cost-effective upgrades to the hydro facility, including generation -- generator rewinds, turbine upgrades and other improvements. So it was impressive that a lot of that work was able to go forward during the COVID year as well. And we intend to enter into the Western Energy Imbalance Market this spring. There were challenges certainly around recruiting and training during COVID, but we do expect that -- we're quite confident that we'll be able to move ahead this year on that project in spring, I should say. And there will be advantages in terms of efficient operation and lower costs. We've talked before about we had a very good experience and seeing real customer benefits moving into SPP out of South Dakota. Now this is not -- the EIM, obviously, is not a full market. So we don't expect to see benefits of that magnitude, but we are looking forward to seeing real benefits there.

In South Dakota, just a little more detail, we do have -- we're well underway on the 60-megawatt project in Heron, and those are the so-called rice units. We expect those to be online late in 2021. That's been a very smooth project, and that's about $80 million, $40 million in 2020 and the rest going forward. That is, again, reflected in the capital budget that I shared. And in addition to that, we're well ahead in planning an additional 30 to 40 megawatts of flexible generation at Aberdeen. Expect that to be online in 2023, and that's approximately $60 million. Again, these South Dakota investments are identified or underway and are included in the capital budget.

Other regulatory items, to provide a bit of an update. As you recall, the Montana Commission did approve a fixed cost recovery mechanism, a.k.a decoupling originally to be effective in July of 2020. Because of COVID and the asymmetric patterns we were seeing between customer classes, we did ask the commission to delay that until July of this year, and the commission agreed. So we will -- we expect the FCRM to take effect next summer.

At the same time, we were wrapping up our Montana rate case successfully, we did file a FERC transmission rate case, and real thanks to everyone who worked on that through all series of settlement meetings, most of which had to be conducted online because of COVID. We did reach a settlement agreement that was filed in November. And as of end of December, we did have cumulative deferred revenues of about $31 million and the refunds have been executed on that. We refunded about $20 million to our wholesale and choice customers in January. And then we expect to submit a compliance filing with the Montana PSC adjusting for credit in our retail rates upon receipt of a final order.

Notable out of the FERC case, we're moving to, call it, a modified forward test year, and there will be a much better harmonization between prices in -- or costs recovered in Montana and recovered at the federal level, which will address a potential gap that we did see there.

And then finally, in this category, each year, of course, we submit tracker request for recovery of purchased power, particularly our purchased power in natural gas and then also property taxes in Montana. The commissions review these. Often, they are relatively straightforward filings. In Montana, unfortunately, in October, the commission voted to disallow $9.4 million in purchased power costs over the prior period. And we've issued refunds associated with that also in January of this year. And we have -- as we've discussed on previous calls, we are extremely concerned about the implications of that order and do not agree with it. But it is for a past period, and we're certainly looking forward to working with the new commission going forward.

We've been doing a lot of work around ESG. Brian heads our internal ESG committee, and actually, everyone on this call is very active contributing to that. We think we've got a great story to tell on all 3 letters of that particular half of it. And among the key initiatives, we have a new landing page, consolidating all of the existing ESG information. That includes disclosures of '19, in some cases, new, in some cases, existing policies and standards that are associated with the best ESG practices. We've also included a new easy reference sustainability statistics report to disclose the 5-year trend of operational and financial ESG data and statistics. So do encourage you to go to the link -- to the web page at the bottom of the page you're looking at right now.

So we really do continue to make very good progress, most notably, the substantial improvement you'll see in the MSCI rating from BB to an A... A couple of other notable things here, along with the investment in system-wide electric vehicle charging, and we've got good projects underway in South Dakota. And we're hopeful in Montana as well. We've also committed to a thoughtful transition in our own fleet starting in 2021. Initially, we'll be targeting about 30% of light-duty and bucket trucks and 20% of medium and heavy-duty to be electrified by 2030.

So again, in summary, a great year despite the challenges from an operational, safety, customer satisfaction perspective in '20 and laid the foundation, we believe, for a particularly good year in 2021. And with that, we'll take your questions.

[Travis Meyer, Director, IR & Corporate Finance]

Thank you, Bob. [Operator Instructions]. We'll take our first question from Andrew Levi.

[Andrew Levi, Analyst]

So I have a couple of things. Firstly, I just have to say, it's Friday and a long weekend, and it's 4 10. So you guys remind me of Hawaiian Electric if that's a joke between -- portfolio management.

[Robert Rowe, President, CEO & Director]

We don't get Monday off, shame on us.

[Andrew Levi, Analyst]

Okay. But maybe you want to rethink things at. But I know it's like around your Board meeting and all that stuff. So anyway, that's my complaint. As far -- I guess, I had nothing to do anyway about the schemes. So as far as you guys are concerned, just a couple of things I've been thinking about. Just first, on a very high level, just looking at COVID and your guidance, how much have you kind of put into your '21 guidance as a -- I don't know if I want to call a dip, but kind of negative effects of COVID?

[Robert Rowe, President, CEO & Director]

Ongoing COVID, yes. Brian, you're ready for that one?

[Brian Bird, CFO]

Yes. I would just say this, Andy, is we kind of backed off our thoughts for the first half of the year expect to receive COVID linger to really through the first 2 quarters. The first quarter certainly is a big quarter for second -- our lightest quarter, typically. So -- and we do expect by the summertime, things are going to be in a much better spot. So that's our expectations.

[Andrew Levi, Analyst]

No, I understand that, but I'm just saying like financially. I guess how much of a...

[Brian Bird, CFO]

Financially, that's how we're looking at margin. That's how we're looking at expenses.

[Andrew Levi, Analyst]

But is it like $10 million? I'm just trying to figure out like if you were in a more normalized environment, let's say, 12 months from now, what would we be adding back?

[Brian Bird, CFO]

Maybe one thing would be helpful, Andy, is we did give quite a bit of detail, if you will, for quarters two through four this year in terms of how it impacted our P&L. And if there's an expectation, we're going to see some of that impact us for the -- certainly, for the first half of this year. That's how I think about it. And then obviously, if COVID's not here and think about organic growth on top of that, that's how things should start unwinding, if you will, out of COVID.

[Andrew Levi, Analyst]

Okay. And then on the IRP process, where you talk about potentially $200-plus million that you feel very comfortable with. So I get that part. Can you just talk about like the part that is kind of unknown at this point and if there is the possibility for more than that stated CapEx?

[Robert Rowe, President, CEO & Director]

What I would say is that in the current RFP, we're actively involved right now in finalizing what we'll take forward to the commission, and we're comfortable that we will have a project as part of that, that will take us over the $200 million threshold. That takes down a part of our customers' exposure to the market, but we didn't include it in this deck. But as you recall, we are -- our customers in Montana are over 45% exposed to the regional market. So we expect that there will be a subsequent RFP. We haven't made decisions about timing, but this is real stuff. This isn't just a policy debate. And I'll say just a little bit about how the system is operating today. Fortunately, we own gas transmission and storage as well as electric transmission and generation. And our folks are doing a fantastic job coordinating with one another but we are on the market, and we don't want to be on the market nearly as much as we are. It's a price risk, and it's even a supply risk. And this is something that can happen in Montana, pretty much any time of the winter, but it can also happen in August. So we're very pleased to be moving ahead with the RFP right now, but we do expect we're going to be going out relatively soon over the next several years with a subsequent RFP to continue to take down our customers' exposure to a market that you just really do not want to be in.

[Andrew Levi, Analyst]

Okay. I understand. So the way I had read it was that you had a lease to -- whether it's a project or two projects, whatever it may be through the RFP, but there were still like unknown relative to this RFP, but you're really talking about future RFPs where there could be continued upside. So I get that.

[Robert Rowe, President, CEO & Director]

Yes, we believe there's well -- there has to be upside in the current, but again, the future RFP is going to be very important, too.

[Andrew Levi, Analyst]

I understand. And then, I guess, I don't know if I want to say whether this RFP or future RFPs, what are you guys thinking as far as like solar/storage as an opportunity and whether that makes sense within your service territory as a way to get some of the shortfall?

[Robert Rowe, President, CEO & Director]

Yes. They have a rule. And one of the reasons that the RFP was structured as it was 5 hour, 10 hour, 20 hour was so that resources of different kinds could participate, and in fact, that has occurred. A great place, if you want to dig a little bit deeper into how these things behave on our system, is a filing our supply planner has made with the Montana Commission in December. And there's a really robust discussion of different kinds of resources and their effective load-carrying capacity, or ELCC, contributions of resources and -- but actually, it's one of the best things I read last year. So there is a place, but you've got to be, I think, practical about what that place is. And remember, on our Montana system right now, we are pushing -- we're not quite there, but we're pushing 70% carbon-free. And we've got about 450 megawatts of wind on our system right now. And unfortunately, today, when we need it most desperately, the production is negligible. So it's a long answer, but I think that's the best way to think about it. And I really would encourage you to take a look at the this December supply supplement?

[Brian Bird, CFO]

Bob, Bob, I'd like to just add one thing, too. I think, obviously, we wanted to participate in this RFP for build that's going to take place in the 2022-2023 time period. There'll be, as Bob pointed out earlier in the call, another RFP maybe late this year, early next year, and that would be for builds in the '24-'25 time period. And we'd like to think we're going to have an opportunity to participate in that as well. So I just want to make sure that people understand there's really going to be 2 of these coming.

[Robert Rowe, President, CEO & Director]

And just one more comment there. If you look at, again, at the 5-year capital forecast and think about how any kind of future project might be layered in there, I think that's quite positive as well.

[Andrew Levi, Analyst]

Okay. And then this question's for Brian. I should have said at the beginning, congratulations, Brian.

[Brian Bird, CFO]

Thanks, Andy.

[Andrew Levi, Analyst]

Very proud of you. You're almost there. You're almost in the Executive suite. We're actually here in the Executive suite, but the CEO office. You're almost there. So let's see. As far as the financing plan, it's very straightforward, okay? So I understand it. The one thing I just don't really understand, though, is why are you doing an ATM versus just issuing. Because look, you give us your shares outstanding. So it looks like you need about 75 million of equity this year, give or take, right, which is like 1.3 million shares why not like just issue it to us? Because your stock trades traded 271,000 shares today. And in general, and that was all on the close really by like 3:00, and it traded like 160,000 shares. It's going to take you like all year, I'm exaggerating, to do it. But like whether it's me or some other people like me, we could easily take down your shares at a small discount, and then you wouldn't have this affecting the performance of the stock because, truly, I believe it can because the stock unfortunately trades so thinly, as do a lot of utilities at the current moment because of the way the market is.

[Brian Bird, CFO]

Well, I appreciate your view, Andy. I would tell you this, we've had great success with ATM in the past. And in fact, we have quite a bit of build, as you know, both from the generation side in South Dakota and our current plan in terms of capital needs. I would tell you this, that the ATM, like I said, served us well. We're bullish on our share price that it's going to be going up over this time period. There's another reason we like what we're doing here. But I'd also tell you nothing precludes us from doing anything else. If something better comes along, it makes sense for us to issue shares. We could possibly do that as well. But right now, the plan is to -- over a three year period is to raise that $200 million to meet our current needs.

[Andrew Levi, Analyst]

And just to understand, through your ATM, I mean, I guess from what you're saying is if someone wanted to come and make a bid, I guess, for no better way to put it, I don't know that's not the right term, if you take down a block -- a small block of your stock, I guess that is -- that could be part of the ATM as well.

[Brian Bird, CFO]

I'm just saying we have flexibility to either use the ATM or something else, if something else better comes along.

[Travis Meyer, Director, IR & Corporate Finance]

[Operator Instructions]. We'll take the next question from Michael Weinstein at Credit Suisse.

[Michael Weinstein, Crédit Suisse]

So to follow up on Andy's questions, in terms of what you're thinking about rate cases in Montana going forward, considering 2020 as a test year, I guess, if you were going to do it this year? And 2020 is a funny year, right? So I don't know if that's really -- yes, I'm just wondering what your timing is looking like. I think, normally, you provide an update in April, right? But...

[Robert Rowe, President, CEO & Director]

Yes. And I can confidently say that we eventually will file a rate case in Montana. This year, I think our focus will -- it will be an "all hands on deck" focus will be on the preapproval filing associated with the supply plan implementation.

[Michael Weinstein, Crédit Suisse]

Right. So that would be the primary focus of this year will be the preapproval. That's going to take most of the year?

[Robert Rowe, President, CEO & Director]

I think realistically, they're -- once they determine the filing to be sufficient, they're on basically a 9-month shot clock.

[Michael Weinstein, Crédit Suisse]

Right. And then I wanted to see about the -- about the transmission rates, do you have the ability -- let me see here, not the transmission, but the disallowance on Colstrip. Is that final at this point, I mean, the $9.4 million? I mean, I guess it's been a couple of years in the making.

[Robert Rowe, President, CEO & Director]

It is final. Yes.

[Michael Weinstein, Crédit Suisse]

Yes. And is there a reason why Montana is just a final analysis just thought that you didn't deserve recovery of that? I mean, it sounded like -- the explanation you provided sounded pretty reasonable. It's not your fault.

[Robert Rowe, President, CEO & Director]

We certainly thought so. And Crystal was one of the key witnesses in that proceeding. There were basically two questions. One had to do with whether the outage associated with taking the plant down partially for environmental compliance was in some way imprudent when we went to the market to procure replacement power; and then, secondly, the timing of elimination of the deadband under a statute that was passed. We were very concerned, disappointed and strongly disagreed with what the commission decided. And -- but it is now a past period, and we're not appealing. We are, on the other hand, really focused on working with the new commissioners, the new tariff, the commission to continue to improve things.

[Michael Weinstein, Crédit Suisse]

In fact, on that subject, the new commission makeup of it looks like there might be some chance or some room for improvement in terms of regulatory treatment going forward. Do you have any comment on what kind of -- I guess what the new priorities might look like going forward? In the past, there's always been sort of this legislative focus on making sure cold jobs are maintained in the state. Is that -- has any of that changed going forward, do you think?

[Robert Rowe, President, CEO & Director]

What I would -- first, a comment about the commission. We -- obviously, you've got a fantastic relationship with the South Dakota Commission that translated into being able to invest to serve our customers there very efficiently in Montana, and we want to have the same kind of relationship with the commissioners with the staff and then, ultimately, of course, with the consumer council as well. Most of the commission's decisions that we're concerned about are driven by advocacy from the consumer council. I'm impressed by the new -- the 2 new commissioners, very impressed, and believe that there are going to be strong additions to the commissioners who are returning.

Chairman Brown is a lawyer. He's got a graduate degree in tax. He's spending a lot of time, my impression is, on really managing the commission and the process, and that's something that's extremely important to him. At the same time, our legal and regulatory folks are reciprocating, working with their counterparts at the commission. That's all very positive. We've had a number of good informational meetings. Even in COVID land, had a very substantive overview of the company with the 2 new commissioners going back to December. We had, in January, we had, I think, an excellent presentation by our supply leaders to the full commission really focusing on the peak deficit, the exposure to the regional market and what we hope to bring out of the RFP. They were very, very engaged. They understand the concerns and are, I think, committed to addressing them in a couple of weeks. We've got an overview of our financial operations. And the 2 areas where I think state commissioners really need to focus to be successful in their jobs as far as I'm concerned are operations and finance. So I understand how their decisions affect our ability to do our job. So very encouraged by all of that.

The other thing I would say on a larger scale in Montana is that for the first time in many, many years, there's a political alignment between the governor, the legislature and the commission. Governor Gianforte, he is a very successful entrepreneur. He founded right now -- technology is ultimately sold back to Oracle. Oracle has continued to invest in Montana. And I've made the point, he would not have been able to create so much wealth and value in Montana if that company had been subject to the kind of challenges that we've been subject to at time. He is committed to investment in the state's essential infrastructure. He certainly is committed to maintaining the viability at Colstrip as a key asset for its useful life. In the legislature, the Republican majority has actually increased. They work very closely with the governor. And then at the commission, we talked about, I think, very strong additions that the two new commissioners will be for the commission is important to work.

[Michael Weinstein, Crédit Suisse]

Yes. I guess it's just striking to me that the write-off, you have to write off purchase power cost for an outage at Colstrip that, that would be a perfect illustration of why reliance on the western market for purchases is a problem. It's sort of inconsistent, I guess, with the view, the prevailing view that has been in the state about ownership of generation at the utility. And I'm just wondering if that is -- if that's changing going forward.

[Robert Rowe, President, CEO & Director]

I would say that, if anything, there is a greater appreciation of the value of owned generation as part of the portfolio. And we don't -- for perspective, we own less of our generation than do many companies, particularly in the nonorganized market. And we talked about how vastly more exposed we are to the regional market at peak than any of our peers. And again, looking out the window, it's beautiful, but it is snowing and it is below zero. And I would be much, much more comfortable if we had control of more of our own resources to serve our customers.

[Michael Weinstein, Crédit Suisse]

Makes sense. Congratulations, Brian and Crystal.

[Brian Bird, CFO]

Thanks, Mike.

[Travis Meyer, Director, IR & Corporate Finance]

We'll take our next call from Jonathan Reeder of Wells Fargo.

[Jonathan Reeder, Wells Fargo Securities]

Can you hear me now?

[Travis Meyer, Director, IR & Corporate Finance]

Yes. Sure can, Jonathan.

[Jonathan Reeder, Wells Fargo Securities]

You were kind of almost getting into it, I thought, with the last color there, Bob. But what are your thoughts on some of the bills that have been introduced in Montana this year? I think there's one that we get rid of the preapproval process, while another would expedite the time that the MPSC has to authorize preapproval. Where do you think those head this year? And how does that impact the current RFP and the future RFP plans?

[Robert Rowe, President, CEO & Director]

Yes. Very directly, I think that the bills, quite honestly, the bill sponsored by the majority are much more likely to go forward than the bill sponsored by the minority. And the bill clarifying the current preapproval process is much more likely to go forward. I believe actually the bill eliminating preapproval either has been or soon will be tabled, which is appropriate. And a number of other bills we're paying attention to are ones, for example, that were passed in previous legislation -- previous legislators and then unfortunately, were vetoed. And in fact, the preapproval bill, the preapproval repeal bill has already been tabled, and we feel very good about that. So it's -- I think there's an opportunity to do some things in this legislative session that will allow us to better serve our customers. And that's very important.

[Jonathan Reeder, Wells Fargo Securities]

That's interesting to make the comment about ones that have passed but then or vetoed. Are there any that fall in that bucket that we should be particularly aware of? I'm trying to think back to past legislative sessions what they might have been...

[Robert Rowe, President, CEO & Director]

Two that come to mind immediately. One of the legislature prohibited subsidies in that metering. It didn't prohibit the metering. It's simply prohibited cross subsidies from one group of customers to another. And unfortunately, the previous governor vetoed that bill. I'm certainly hoping that there will be progress to make net metering a fair and sustainable program, something that we can support and, in fact, make available to our customers without harming other customers.

The second bill that was approved in the previous session and vetoed was the community renewable energy portfolio standard. And that we had found to be really unworkable. The challenge is projects to qualify as preps has to be both below a certain size and not -- and meet the cost threshold to serve our customers. It's very, very difficult to meet both thresholds. So it's been a big distraction for us. We have managed to get most of the way to our -- requirement, but we certainly believe that modifying or eliminating that requirement would be a substantial step forward.

[Jonathan Reeder, Wells Fargo Securities]

Okay. And then the only other question I had was on the Montana decoupling pilot that goes into effect in mid-'21. Remind us, will we see the true-up to normal flow through the P&L in the second half of 2021? Or does it not occur until the end of the 12-month period?

[Robert Rowe, President, CEO & Director]

I'm going to put Crystal Lail on the spot to answer the first question in her new role. She was close to that.

[Crystal Lail, VP & CAO]

Thanks, Jon, throwing one my way. Yes, the FCRM, we expect at this point still to implement that pilot beginning in July, and we will report that. You'll see it in our earnings on a quarterly basis.

[Travis Meyer, Director, IR & Corporate Finance]

We will take our next call from the line of Ryan Greenwald at Bank of America.

[Ryan Greenwald, Bank of America Merrill Lynch]

Can you hear me?

[Travis Meyer, Director, IR & Corporate Finance]

We sure can.

[Ryan Greenwald, Bank of America Merrill Lynch]

Congratulations to both Brian and Crystal.

[Brian Bird, CFO]

Thank you, sir.

[Ryan Greenwald, Bank of America Merrill Lynch]

So assuming you guys are successful with some of the generation projects in Montana and you guys get the preapproval, how would you kind of frame equity needs on the dollar of additional spend from here?

[Robert Rowe, President, CEO & Director]

Brian?

[Brian Bird, CFO]

Yes. I'll grab that one. I think I would just assume for practical purposes, it's a 50-50 capital structure associated with that.

[Ryan Greenwald, Bank of America Merrill Lynch]

Got you. And then just -- maybe just lastly, given the discrepancies in valuation across the space and where you guys are currently trading, how are you kind of framing consideration for anything strategic from here?

[Robert Rowe, President, CEO & Director]

That was an artful way to put the question. What I would say is we are really focused on the opportunities right in front of us. Brian, do you want to take that one this time?

[Brian Bird, CFO]

I'll grab this one, Bob. I think from my perspective, we certainly think we are undervalued. We're certainly not three turns worse than our peer average, as some people have us today. And I think our the best thing we can do is increase the value of our company, and that creates strategic opportunities down the road, and we'd be better positioned either way in a stronger position. And right now, our share price, certainly relative to our peers, isn't where it should be.

[Robert Rowe, President, CEO & Director]

And again, going back to focusing on what's in front of us, if we're able to invest and if the financial community is more comfortable with Montana, ultimately, that's good for the company and very good for the customers.

[Travis Meyer, Director, IR & Corporate Finance]

It appears as though Andy Levi decided this was more fun than skiing after all and looks like he raised his hand again. Andy, do you have another question?

[Andrew Levi, Analyst]

No, just on the last question, like the strategic question, like, just like very logically, like looking at where your stock price is, where your P/E ratio is, I mean there's nothing you can do. I mean you could. You could do like some like crazy dilutive deal. But I mean, I guess I would view you as something that somebody would be kind of looking at. I understand you guys aren't looking to do that and you want to get your value. But there's really -- based on your stock price, there's really nothing strategically you can do. Is there?

[Robert Rowe, President, CEO & Director]

And I would answer that by saying, where are you going skiing this weekend?

[Andrew Levi, Analyst]

Okay, that's fine.

[Brian Bird, CFO]

Yes. Andy, great commentary, but we're just going to take that as no question. So I appreciate your opinion.

[Robert Rowe, President, CEO & Director]

I will tell you as soon as worth here, I'm going to go out and play in that.

[Andrew Levi, Analyst]

Well, you start look, if you look at kind of the latest 13-F, I want your stock price to do well, but absolutely. And I think it's super, super cheap here, but I don't want people to think that you guys are out shopping for something.

[Travis Meyer, Director, IR & Corporate Finance]

All right. With that, it looks like we've exhausted our Friday afternoon queue. And so I will hand it over to Bob and/or Brian to close out the call.

[Robert Rowe, President, CEO & Director]

Just to finish the way we started, it's been fantastic to work with Brian as CFO for many, many years. He's going to do a great job as COO. All of the operational needs are looking forward to working with him in that capacity. And Crystal, based on her career, is stepping into her new role just about as well prepared as can be.

So thank you for spending your Friday with us before what is for everyone other than us a three day weekend. And as I said, I'm going to go outside and play in the snow. Have a good weekend.

[Brian Bird, CFO]

Bob, if I could, I'd like to say just a couple of things.

[Robert Rowe, President, CEO & Director]

Absolutely. My gosh. Yes.

[Brian Bird, CFO]

Well, first of all, likewise, Bob, I know our combined 30 years actually continues just with different roles. And so I enjoy -- continue to enjoy our relationship and look forward to adding on to those years. I'm also excited for Crystal. I started this job 17 years ago in my early 40s, and that's where Crystal sits. I expect similar great things from her, probably even better than certainly my performance over that time period. And lastly, I I'd like to thank Travis. Everybody knows Travis Meyer. He does a fantastic job. And you may not know Tory Payne, who works with Tory. The two of them make a fantastic team and I think one of the best IR department is in this space. And so I want to thank those guys for their help as well. So -- and thank all of you who support the company. Really appreciate not only the support of the company, but support that you've given me as CFO. So thank you very much.

[Travis Meyer, Director, IR & Corporate Finance]

Thanks, again, for joining us. And with that, that brings us webcast to a close. You may now disconnect.