NorthWestern's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: NorthWestern Corporation (NWE)

NorthWestern Corporation (NYSE:NWE)

Q1 2013 Earnings Call

April 25, 2013, 03:30 pm ET

Executives

Travis Meyer - Director, Investor Relations & Corporate Finance

Bob Rowe - President & CEO

Brian Bird - VP & CFO

John Hines - VP, Supply

Analysts

Paul Ridzon - KeyBanc

Michael Klein - Sidoti & Company

Charles Fishman - Morningstar

Brian Russo - Ladenburg Thalmann

Michael Bates - D.A. Davidson

Chris Ellinghaus - Williams Capital

Jonathan Reeder - Wells Fargo

Andrew Levi - Avon Capital

Operator

Good day everyone and welcome to today’s NorthWestern Energy Corporation, First Quarter 2013 Financial Results Conference Call. Today’s conference is being recorded. And at this time, I would like to turn the call over to Mr. Travis Meyer. Please go ahead.

Travis Meyer

Thank you. Good afternoon and welcome to NorthWestern Corporation’s financial results conference call and webcast for the quarter-ended March 31, 2013. NorthWestern’s results have been released and the release is available on our website at www.northwesternenergy.com. We also filed our 10-Q after the market closed yesterday.

Joining us on the call today are Bob Rowe, President and CEO; Brian Bird, Vice President and Chief Financial Officer; Kendall Kliewer, Vice President and Controller; Heather Grahame, Vice President and General Counsel; John Hines, Vice President of Energy Supply and Dan Rausch, Treasurer.

This presentation contains forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based upon our current expectations and speak only as of this date. Our actual results may differ materially and adversely from those expressed in our forward-looking statements as a result of various factors and uncertainties, including those listed on our Annual Report on Form 10-K, recent and forthcoming 10-Qs, recent Form 8-Ks and other filings with the SEC. We undertake no obligation to revise or publicly update our forward-looking statements for any reason.

Following our presentation, those who are joining us by teleconference will be able to ask questions. A replay of today’s call will be available beginning at 05:00 PM Eastern Time today through May, 25, 2013. To access the replay dial 888-203-1112 then access code 2569194. Again, that is 888-203-1112 then access code 2569194. A replay of today’s webcast will also be available on our website.

I’ll now turn it over to President and CEO, Bob Rowe.

Bob Rowe

Thank you, Travis. First, just a word about the new voice at the start of the call; and all of you I know enjoyed working with Dan when he was in that role and he’s stepped into the Treasurer role and I am sure most of you have talked with Travis very well over the years too and we are delighted that he has agreed to step into the Investor Relations role and I am sure you are all looking forward to working even more closely with Travis and we are very pleased with the job he is doing for us in that role as well. So thank you Travis, and Dan and Travis congratulations to both of you.

We are very happy with our financial results for the quarter. Our operating income and net income both improved in the first quarter of 2013 as compared to the same period in ’12. There are several drivers behind this that Brian will discuss in more detail in just a minute. However, I would like to cover a few of the highlights for the quarter before handing it over to Brian.

On our February call, we informed you that we placed our new Montana wind facility Spion Kop into commercial operations at the end of ’12. That was now more than full quarter of successful operation of the 40 megawatt facility under our belt. We continue to experience a capacity factor in the mid 50s that significantly exceeds our expectations and is really benefiting our Montana electric customers.

In South Dakota, we are in the final phases of testing our 60 megawatt natural gas peaking facility located in Aberdeen and as you had hoped for a large project [Speaker] is coming in on time and under budget. We expect to place the new asset into commercial operation during the second quarter in order to meet our summer peaking needs.

The first quarter of ’13 was also the launch of the production phase of our multiyear Distribution System Infrastructure Project or DSIP in Montana. We spent the last two years in a ramp-up phase laying the foundation for what would be a very capital intensive five-year period to improve the safety and reliability and capacity of our electric and gas distribution systems in Montana and to generally reverse the trend on ageing infrastructure.

As some of you certainly have heard, just earlier this week we received favorable news regarding our natural gas rate filing in Montana. As many of you know, we reached stipulations with interveners in April to increase delivery rates by approximately $11.5 million on 9.8% ROE and a stipulation also addressing allocated cost of service and rate design which often is contentious and always an important part of Montana rate proceeding.

Just Tuesday of this week, the Montana Public Service Commission voted four to one to approve the stipulations and direct the commission staff to prepare a final order approving the $11.5 million rate increase and the allocated cost of service rate design. As a result of having had interim rates in effect since April 1st and a final order on its way, we will report revenues consistent with the stipulation for the entire second quarter this year.

We are also really excited to share with you news that we are now three times in a row recipient recognition from Forbes as one of America’s 100 Most Trustworthy Companies and we thought to discuss this with you in the two previous years and what I want to emphasize is that the rigor and the analysis that fit into this and the fact that Forbes and it’s consultants evaluate a universe of 8,000 publicly traded companies. So to be recognized as one of the 100 Most Trustworthy from among 8,000 companies, many of which truly are excellent, really is something that we are all proud of that and it’s a credit to our Board, management, but ultimately to all of our employees and so there is a lot about the transparency and the integrity that we do try to achieve.

And last certainly not least, yesterday the Board of Directors declared a comment stock dividend of $0.38 per share payable on June 30th, to shareholders of record on June 14th.

Now I’ll hand it over to Brian to discuss our first quarter results.

Brian Bird

Thanks Bob. As Bob mentioned, we are very pleased with our financial result this quarter. We reported consolidated net income of $37.9 million or $1.01 per diluted share for the quarter ended March 31, 2013 as compared with net income of $32 million or $0.88 per diluted share for the same quarter in 2012.

This was a fairly straight forward quarter with relatively normal weather and no significant items that we would deem one-time in nature. There were three primary drivers that are accounted for our improved performance year-over-year.

First higher margins from new gas and electric supply assets, colder weather and stronger electric and gas transmission results. Second, higher operating expenses including DSIP expenses and other expenses that could be expected for growing company including higher supply and production cost, higher property taxes, depreciation and interest expense. As a result, pre-tax income was up $3 million or 7% on a year-over-year basis.

And finally the third item, income taxes were approximately $3 million better than the prior year based upon increased repairs deductions and PTCs from the Spion Kop project. As a result, net income was approximately $6 million or 18% better than the same period last year.

Recognizing that was a very high level overview, I’ll break the results down a little further for those interested in the details. First of all, gross margin increased by $10.1 million as compared to the first quarter last year. Primary drivers there were an increase in natural gas production margin, primarily due to the acquisition of the Bear Paw assets in the third quarter of 2012; an increase due to the acquisition of Spion Kop wind farm in the fourth quarter of 2012; an increase in natural gas and electric retail volumes due primarily to colder winter weather than last year, although as I mentioned earlier very close to normal weather for this quarter; an increase in transmission capacity revenues due to higher demand to transmit energy for others across our lines due to favorable wholesale market pricing conditions; an increase in transportation and storage capacity revenues due to higher demand to transmit natural gas for others across our pipelines and higher demand to store natural gas for others as a result of lower average natural gas prices and a slight increase in DSM loss revenues and Montana property taxes recovered through our trackers.

These gross margin increases were partly offset by a $4.3 million lower Dave Gates Generating Station or DGGS revenue in the first quarter of 2013. More specifically, in the first quarter of last year we recognized $2.7 million of revenue that have been deferred in prior periods based upon a final order and compliance filing with the Montana Public Service Commission. In addition, during the first quarter of 2013, we deferred an additional $1.6 million related to the FERC ALJ initial decision as compared to the same period in 2012.

Moving on to the expense side, our operating, general and administrative expenses increased by $3.2 million, primarily due to higher DSIP expenses, increased non-employee director’s deferred compensation expense, largely due to increases in our stock price and I should point out the impact of this increased expense is fully offset in our other income with no net impact to income. With all that increased production expense due to the Bear Paw natural gas, Spion Kop wind acquisitions and increased insurance expense related to general liability matters. These expense increases were partially offset by reduced pension expense with the expiration of our pension accounting order at the end of 2012.

Property and other taxes increased by $2.1 million due to higher valuations in client additions. Depreciation expense increased by $2.8 million due mainly to plant additions. As a result gross margin and expense items already discussed increased by $2 million from the first quarter last year. Below operating income interest expense increased by $0.8 million, primarily due to higher debt outstanding partially offset by higher capitalization of debt AFUDC.

Other income was $1.7 million higher than the first quarter last year due to non-employee directors deferred compensation offset discussed above and also higher capitalization of equity AFUDC. Finally, income tax expense declined by $3 million, resulting in effective tax rate of 11.7% this year as compared to 20% for the same quarter in 2012. This decrease in tax expense is primarily result of increased flow-through repairs deductions and production tax credits from Spion Kop. Our earnings for the quarter were $1.01 per diluted shares. This represents a $0.13 increase from GAAP earnings in the first quarter last year and a $0.09 increase from what we would call adjusted EPS for the first quarter of 2012. We recall first quarter last year we added $0.09 for unusually mild weather and we removed $0.05 for the release of the Dave Gates generating station deferred revenue.

Turning now to our earnings outlook for the remainder of 2013. For the full year we are reaffirming our 2013 fully diluted earnings per share to be in the range of $2.40 to $2.55 per share. Our primary assumptions for the guidance range including a consolidated income tax rate of approximately 12%. Also scheduled routine maintenance at our Colstrip, Big Stone and Coyote generation plants during the second quarter of 2013, diluted shares outstanding of $38.1 million and continued normal weather in our service territory for the remainder of 2013.

Now moving to the balance sheet; as of March 31, 2013 cash and equivalents was about $6.9 million compared with $9.8 million at December 31, 2012. The company had $253.3 million available from its revolving credit facility at March 31, 2013. This is compared with $173.6 million at December 31, 2012. Total debt at March 31, 2013 was just under $1.1 billion. The company has a debt-to-total capitalization ratio of approximately 53% at March 31, 2013 and as we have consistently stated we continue to target a 50% to 55% debt-to-total capitalization ratio.

As of March 31 we have received a total of 46.2 million from our equity distribution plan since we started the plan in 2012. $17.7 million of the proceeds were received in the first quarter of 2013. Our equity distribution plan extends to the end of 2014 and authorizes up to a $100 million in total issuances.

All-in-all I'm happy to report this is a very solid quarter for our utility and with that I will turn it back over to Bob.

Bob Rowe

Thank you, Brian. I will start by telling you that we are meeting today from our operation center in here in South Dakota. Just finished our Board meeting, our annual meeting. As we always do, we had an employee meeting first thing this morning and community leader and a retiree event just shortly before this call. So it's always a lot of activity around the Board meeting and especially our annual meeting. Coming fresh off the heels of the Montana natural gas decision that I mentioned at the top of the call. I will start with a few notes on the regulatory front. We did spend two full days in the hearing room at the Montana Public Service Commission last week. We had a constructive hearing of parties and the commissioners, we're all very engaged.

Much of the contention that can happen during a rate case was really addressed I think very constructively by the parties in advance thanks to the stipulations that we're reached with almost all of the parties. We acknowledge concern around the sub-10% ROE that we agreed to in the context of our belief to attract capital, but we do believe that the resulting 11.5 million revenue increase represents a reasonable outcome all around and is in the long-term interest of both our customers and our investors. We were authorized to implement interim lease effective April 1 and we know that final order is now in the process to be a graphic.

So as a result of that, we will be able to recognize a fourth quarter, the final rates has been approved for the full second quarter. Several of you’ve asked about our future rate filing plans. As we mentioned before, each year we perform an analysis in each of our jurisdiction. So for example, Montana Gas, Montana Electric, South Dakota Gas, South Dakota Electric, and Nebraska Gas to determine whether we need to file a rate case in any of those jurisdictions.

Based on our analysis of 2012 actual results we’ve anticipated known and measurable adjustments. We currently do not believe that any additional general rate filings are necessary during the remainder of 2013, how we have been able to manage our business in a matter that will provide ahead of returns to investors, while delaying the implications of raising rates to our customers.

We had anticipated filing a general electric case in South Dakota this year, based on our 2012 test here, however we don't believe a general rate case now will be necessary in South Dakota until ‘14. When we do file an electric rate case in South Dakota we expect to request an environmental rider to recover future environmental related expenses and capital cost associated with both Big Stone and Neal 4 until such a rider is authorized we will continue to record AFUDC on our capital investments during construction.

Closely look on another important state regulatory item we have been describe in on our earnings calls and as we specifically discussed in the last quarter. We spend several years involved in [attractive] litigations surrounding the calculation, the power prices in a purchase power agreement that we have with Kop and as you know Kop is a qualified facility under (inaudible).

We were pleased to tell you in February that we expected to Montana Public Service Commission to review a series of filings that we have made with it and issue a final order of consistent with a decision that was issued in our favor by an arbitration panel late last year. The beginning of this month in fact we did receive the Montana PSC order we’d hope for and that’s put an end to a contract dispute that actually started in 2007. Both parties now look forward to a much more constructive relationship towards the remaining life of the contract.

Moving to FERC and its generating station allocation issue, we have been discussing all for several quarters, unfortunately there is no news since our last call, but for any of you that may not be as familiar with this matter I will provide just a little bit of additional background and for many of you this is very familiar territory.

FERC Administrative Law Judge issued initial non-binding decision in September 12 regarding the allocation of cost of a new gas plant that we put into service in January of ‘11 which will provide regulating reserves to both retail and for jurisdictional customers and we already had a positive order from the Montana Commission on this matter. The initial decision from the FERC ALJ resulted in an allocation to the federal jurisdictional customers and it was only a fraction of the amount that we believe should have been allocated based on past practice. But as a result of the initial decision, we are continuing to differ revenue at approximately $700,000 for the month.

Our brief as well as others from the Montana Commission, the Montana Consumer Council by the power administration and our trade organization there is an electric institute all in our position to ALJ initial decision is pending before the FERC along the (inaudible) on the other side. We have no assurance timing as we described you before, but based on past experience we expect the FERC to consider the matter an issue where binding decision sometime during ‘13 should know that we have as part of our filing requested oral argument in front of the Commission. The FERC is not obligated to follow any of the finding from an ALJ initial decision, except we reject the initial decision in whole or in part. If the FERC upholds the decision and a fortunate cost are effectively disallowed at that point we will be required to assess DGGS for potential impairment.

As you all know if we disagree with the decision issued by the Court ultimately, we may pursue full appellate rights through re-hearing an appeal to the United States Circuit Court of Appeals and that could extend the matter into 2015. So again no news to provide this court further back (inaudible) to anyone who has not followed the issue very closely.

Now I would like to turn the discussion to several of our growth opportunities. As I mentioned at the start of the call, the blades on the 40-megawatt Spion Kop wind facility have been spinning very successfully for nearly five months now and we are only a few weeks away as well from facing our Aberdeen natural gas peaking unit in the service. We believe as we've discussed previously that the next likely large addition to our electric supply portfolio will be on the Montana side that would be a natural gas generating asset held for place tower from a 200-megawatt contract with PPL Montana that expires a little over a year from now.

As we continue to evolve for the more vertically integrated utility in Montana, our natural gas combined cycle combustion through the north (CCCT) has been identified as the type of generation asset that can provide the flexibility to best serve our customers into the future. The supply portfolio requirements that we are addressing include the (inaudible) provision of ancillary services, baseload power and digging power. While we continue to evaluate any opportunistic acquisitions, we are also moving forward in a deliberate way on development of the CCCT.

To that end, we have several meetings now with potential engineering, procurement and construction contractors or EPCs and we are currently conducting a sighting study for a nominal 250-megawatt combined cycle plant in Montana. The sighting study proved to reveal the availability of electric and gas transmission, land, water, ease of permitting and necessary infrastructure such as roads, railroads and the skills and dedicated work force and we are currently conducting specific on-site investigations of these issues.

We expect to complete a sighting study in the third quarter of this year to be followed up quickly with the identification of specific technology to be deployed consistent with the timing set forth in our 2011 by any of Montana, by any of integrated resource plan. We anticipate 2018 commercial operation for a new build option and we will continue to update you on progress as is appropriate.

And then as a reminder we will also be filing our next Montana record supply plan towards the end of this year with more detail about our future plans. In South Dakota, we continue to move ahead on our environmental projects, jointly owned baseload plants. We are in the final year of construction on the emission reduction project at our Neal plant in Iowa and Northwestern share of the total project is estimated to be between $25 million and $30 million and that's expected to be completed by the end of this year.

We see a good project update from the plant operator at our Big Stone Plant several weeks ago for the air quality control system that is being installed there. Due to design and engineering improvements along with reduced contractor costs, the total project costs have been shaded down by about $85 million down to a total of $405 million. As a result, our 23.4% share of this capital project is now estimated to cost between $95 million and $110 million and this is a [$20] a good news for our customers decreasing from a previous estimate of $115 million to $130 million.

So again our estimated share is currently between $95 million and $110 million. And again good news for our customer is that help to alleviate some of the effort pressure on rates, although we continue to work to meet EPA and South Dakota requirements. Tomorrow, I will actually be participating in a groundbreaking ceremony at the plant with our partners (inaudible) along with South Dakota’s Governor Dennis Daugaard.

Turning next to natural gas supply and our portfolio needs in Montana, we're currently able to serve approximately 10% of our total 20 BCF annual retail natural gas needs in Montana with the gas acquisition that we've made recently and that will create (miracle). The investment in Battle Creek was authorized to be included in our rate base in November of last year. Based upon this decision, we've been collecting the cost of service for a more recent Bear Paw Basin acquisition and that includes a return on our investment through our natural gas supply tractor on an interim basis. We expect to file an application with the Montana commission to place Bear Paw in to our natural gas rate base during 2013.

These natural gas reserves have been performing very well and serving our customers as anticipated. As we said before, our desire would be to own approximately 50% of our retail natural gas needs to provide long-term price stability to what history have shown to be a very volatile market.

In February, I use the metaphor that we're taking the tires and have gotten into test drive on future acquisitions, unfortunately I am not able at this time to announce any specifics, but it is fair to say that we're moving at least past the test drive say or at least to one of those, very, very long test drives for the launch like the Volkswagen commercial. However, like anything else we do, we want to make sure we're making thorough and thoughtful decisions that are going to be in the best interest of our customers and our investors over the long term, but we also provide you a further update by next quarter.

Turning to our distribution operations, as part of our commitment to maintaining a safe and reliable electric and natural gas system we continue to evaluate the condition of our distribution assets to address aging infrastructure through our DSIP activities. The primary goals of our infrastructure investments are to reserve the aging infrastructure, maintain reliability and proactively manage the system for safety, capacity and to prepare our network for the adoption of new technologies as those make sense.

Over the past two years, we have been again in the ramp up stage of the DSIP plan and amortizing expenses associated with the preparatory work. The first quarter 2013 marked what we would called a hard start of the remaining five years of the project for the full production phase and everyone truly hits the track as soon as the green flag dropped and people are working extraordinarily hard on successfully at a very exciting project.

During ‘11 and ‘12 we utilized the accounting order for the Montana Commission to defer about $16 million of expenses during our two year phase and the amortization of these expenses will be about 3.1 million annually over a five years starting at ‘13 and this amortization is an addition to the approximately 11 million of expense that we expect to incur on these in ’14. In terms of our DSIP capital spend, we spent up about three for 1 million in the ramp up phase and plan to invest another 253 million capital over the next five years.

Based on our current plans along with Montana Commission’s approval of the accounting order, we believe DSIP related expenses and capital expenditures will be recovered in base rate through annual or biannual general rate cases. Concerning our transition operations we are progressing slowly, we remain in the process related to the proposed upgrade to the close of 500kV wind, the project’s viability as we discussed before and timing depended on other investment with the Bonneville Power Administration’s plan further less on the primary 500kV.

We are focusing our efforts on this project and we are doing the BPA and their system plans. As on March 31 we have capitalized around $1.2 million of preliminary survey and investigated cost associated with this upgrade. We expect very little additional capital spend until a decision is made by BPA to move forward.

The investment potential for the cost of 500 KV ranges from about $40 million to $70 million depending on how many if you have the cost of owners might ultimately decide to participate in the project. The upgrading the system could be completed by the end of 16. However as I mentioned a moment ago both liability and timing really do depend on action on the BPA side.

In the meantime we are continuing to focus on our transmission needs within our native service territories and as we discussed before we have across our system 8000 miles approximately of the electric transmission, 2000 miles of gas transmission that will be the core of our transmission operation and where we have always based our primary focused.

We had several updated and expansion projects and process that well served to improve reliability and response to growth and demand. Our recent projects include the Jackrabbit, Big Sky Transmission 161 kV line upgrade which is totally under construction, first stage of that project came in on time to shut down and that will be ready for ski season with Big Sky, I was personally very, very happy about that, it’s a great project.

And then also the new Columbus to Chrome 100 KV transmission line is in development to respond to infrastructure needs in Southeastern Montana. We expect to spend about $70 million on these two projects over the next five years. We are also in the third year of a project to replace conductors on 100 KV line in our South Dakota service territory. Now these projects are included in our maintenance CapEx as disclosed in our 2012 10-K, but they have been growing in significance over the past several years.

So in summary, our operating income for the quarter improved by $2 million over the same quarter last year. Our net income for the quarter improved by nearly $6 million over the same quarter last year. We feel strongly that the stipulations of our Montana natural gas phase represents an acceptable outcome both for the company and for our customers and we look forward to continuing our focus on maintaining and enhancing the core of our distribution and transmission systems gas and electric across our service territory through continued investments.

We are actively developing new electric and gas assets for the benefits of our customers. The addition of our new energy supply assets on both the electric and gas side to date have proved to be great investments benefiting both our customers and our investors and one more time with three years of recognition as one of America's 100 Most Trustworthy Companies out of 8,000 we look forward to continuing to provide the transparency that all of our stakeholders deserve.

With that, I will wrap up this part of the call and open it to your questions which Brian will answer and I’ll have a pint of water. Thank you and the line is open.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go now to Paul Ridzon with KeyBanc.

Paul Ridzon - KeyBanc

What you changed the language around your effective tax rate and gone going to the bottom end, what's driven that?

Brian Bird

I think when we put together the, our plan for last year there was the things on the tax side that we weren't exactly sure that's why we had a broader range; we had a little more clarity that we got in the first quarter and so we feel more comfortable at the bottom end of the range and that's approximately 12%.

Paul Ridzon - KeyBanc

I think you said if I missed it, what was weather versus normal?

Brian Bird

This year our weather versus normal, there's no adjustment. This weather we had in the first quarter is in line with what our normal weather should be and Paul that's remember last year we had a $0.09 add back for weather because of unseasonably mild weather. But for this year, no adjustment either up or down for weather.

Bob Rowe

It’s out colder, but that's because we are all getting soft.

Paul Ridzon - KeyBanc

And then as the capacity factors at Spion Kop is exceeding expectations I guess volumetrically you are getting more PTCs. Is that part of the lower tax rate and how does that get pass back for the customers, are they like fuel costs?

Brian Bird

Yeah, the capacity factor certainly helped, but PTCs are driven by megawatt hours and we are pretty much in line with what our expectations were in terms of PTCs in the first quarter; it wasn’t materially different than (inaudible).

Paul Ridzon - KeyBanc

And then lastly, it sounds Bob from your comments that self build is kind of where you’re incrementally leaning towards versus the last call on incremental capacity?

Bob Rowe

No, I wouldn't say versus the last call; we have identified since the ’11 plan a gas plant in ‘18 is our likely project in the last call I described some of the steps we were taking at that time. We continue to actually take additional steps that are appropriate for our plants that would come online in ‘18 and John Hines, our Supply Vice President is here and John if you are going to add to that, please do.

John Hines

Yeah, we continue to look at a multi-prong approach, but the gas combined cycle plant has a lot of valuation for our portfolio from a lot of different perspectives that Bob talked about and so we're now taking affirmative steps to move forward on that path.

Operator

We will go next to Michael Klein with Sidoti & Company.

Michael Klein - Sidoti & Company

Just a follow-up quickly on the tax rate, and I know it's early and you are not giving any guidance for 2014, but just to try and understand where the pieces are going to fall and you know what's hitting this year and kind of to what extent you can give some color on what to expect going forward and maybe that’s PTCs or the flow through treatment or whatever else it might be impacted there going forward?

Brian Bird

I think a lot of the benefit we've seen a reduction in our effective tax rate is because of repairs tax deduction as we continue to invest more in our business and primarily things like DSIP contingency additional benefit from that, PTCs have helped, but over the long-term as we've said before, we do expect an upward trend in our tax rate, but we haven't given sufficient guidance and that would go, and I don’t think we have said that we would be turning up I think to around 20% by 2017 as the last guide we gave associated with tax rate, but I think that’s going to be a pretty gradual climb if you will.

Michael Klein - Sidoti & Company

Okay. Do you still expect to get to that tax rate in that same time period or is that may be pushed out a little further or it's really....?

Brian Bird

That’s still our expectation today.

Michael Klein - Sidoti & Company

Yes. Okay and can you just talk about what happened with the pension; you noted something in your prepared remarks and it was a benefit year-over-year, did something, did it expired at the end of 2012, can you just elaborate on that a little bit?

Brian Bird

Yeah, we a while back, recall back in 2009 we made a significant contribution into our pension fund, approximately $92 million and at the time we work with the Montana Public Service Commission and we received from them accounting order that spreads that contribution over a number of years and 2012 was the last year of spreading those expenses out. And so you are going from a 20 plus type, yeah I think I would say the drop is about $20 million, excuse me, you’ve gone from about plus $30 million pension expense down there on $10 million and as a result the reason for that is, on a going forward basis our pension expenses are going to be what we spend and our expectation what we spend is approximately $10 million in 2013. So the higher spend in ‘12 is a result of the final year of that accounting order and the lower spend in ‘13 as a result of our expectations of what was spend on a going forward basis.

Michael Klein - Sidoti & Company

Okay. And last question in terms of how the Commission views natural gas acquisitions and I know they have stated publicly that they are in favor of additional acquisitions with gas prices at the levels they are at today. Now with those comments made by the new commission and it gets following the recent elections or were these comments that had been made previously?

Bob Rowe

Commissioners and staff have made a number of positive comments over a period of time including the time of the last approval. In addition to that discussions with and stipulation with the Montana Consumer Council have been very positive. John why don’t add some more insight there.

John Hines

The old commission was that one obviously that ruled on the Bear Paw acquisitions, but I am sorry Battle Creek, but there were members of the old commission that are still on the commission that have positive statement. In addition transactions that we are looking at will be consistent with a lot of the financial parameters that were set forth in the stipulation between the consumer council and Northwestern.

Operator

Next question is from Charles Fishman with Morningstar.

Charles Fishman - Morningstar

Just if you would clarify in South Dakota, if you received an environmental rider, would that provide for you from general rate case in ‘14 or would you be applying for both the same time?

Bob Rowe

Our anticipation is that we would make the request for a rider as part of the general rate case. So the general rate case would effectively reset everything since we haven't have to go on the electric side in South Dakota for a very long time, but that will be the reset and then the rider would go forward.

Brian Bird

But one thing I would also add to that is one thing even though we will not be requesting the rider during ’13 we will continue to accrue AFUDC up until the time that a rider is approved.

Operator

We will go next to Brian Russo with Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann

Just a question on the equity distribution agreement; what is the forecast for this year or should we expect additional equity sales?

Brian Bird

I think it’s the same common I gave back in February Brian and we may issue up to the full distribution of program. We will continue to monitor our equity needs during the year. I think we have stated numerous times now that based upon the assets that we have shown on our investor presentation those you might remember those that are green if you will or high probability, we will be able to fund all of those assets with our equity dribble program and the cash flows from our business. But as I stated in the past we may and it depends to a degree and what we may do in the remainder of the year in terms of equity needs and capital needs.

Brian Russo - Ladenburg Thalmann

Are gas reserves acquisitions, is that considered green, meaning you can finance gas reserve of acquisitions without additional equity.

Brian Bird

I would say the answer to that is we could utilize the proceeds under existing equity program to finance our gas acquisition needs.

Brian Russo - Ladenburg Thalmann

Okay, so that existing equity program of up to [$146 million] would have been raised. Is that accurate.

Brian Bird

Correct.

Brian Russo - Ladenburg Thalmann

Yeah, okay. And then just on the general rate case strategy or the lack of need to file in ’13, how should we look at the (inaudible) plant that's coming online in the second quarter in South Dakota and the regulatory or the lag associated with that. Where do you overcome that in terms feeling comfortable not needing a rate case.

Bob Rowe

I really can't say much other than what I have said based on what we know for the remainder of this year. We don't anticipate a need to file until ’14, and at that point we would deal with projects including things like the (inaudible), but based on what we know now there's no need to file this year.

Brian Bird

And one additional comment too is we do have trackers associated with any fuel costs or property tax for that asset that would be picked up in costs of service during the year.

Brian Russo - Ladenburg Thalmann

Okay and assuming you build the gas plant for 2018, how do you bridge the gap from when the PPL roll off in mid-2014. You recontract short term PPLs is that the strategy.

Bob Rowe

Yeah, as I noted earlier there is a multi task approach. We would continue to look at opportunistic acquisitions up to a certain point during that timeframe and then we would have in layered our purchase agreements declining over time through 2017-2018 sufficient to meet our needs. One thing to point out is that our portfolio need is significantly less than what it was when we had the PPL contracts originally, so we are only looking at with PPL contracts rolling off that only accounts for around 23% of our total portfolio.

Brian Russo - Ladenburg Thalmann

Okay, and lastly, I noticed in the queue, you have some deferred DSM lost revenues? I think it's about 6.2 million. Just, can you update us on how you see recovery of that and when?

Bob Rowe

There is a hearing in June on our Montana Electric tracker that the DSM loss revenues are part of that tracker and will be subject to that hearing. We don’t expect to see an older (inaudible) until probably a week in the third quarter of 2013.

Operator

(Operator Instructions) We will hear more from Michael Bates with D.A. Davidson.

Michael Bates - D.A. Davidson

Couple of questions; the first quarter was boosted by revenues tied to higher demand to the transmit and store natural gas for third parties. Can you talk to us about whether you see that as a recurring revenue source? Were there any longer term contracts signed or will it be a one time type of event?

Brian Bird

No, Michael, this is more of a trend back to kind of just kind of pre-recessionary type levels. You know, you might recall both on the electric side and gas side, numbers on these matters would have been hotter in the ‘08 and ‘07 time period. We're starting to see a positive trend, really starting this year.

Michael Bates - D.A. Davidson

And I also wanted to ask about the potential acquisition of gas reserves. With regards to the to the Battle Creek and the Bear Paw acquisitions you made, was the entire kicking phase for those transactions as lengthy as has been for the assets that are currently under consideration?

Bob Rowe

I will start and then handed off to John. I am going to stay with this metaphor and just beat it to death. We spend a lot of time, actually several years looking at a whole variety of car lots in many different towns up and down the freeway and ultimately decided more or less where we wanted to shop and what kind of cars we were looking at. So there was a pretty protracted phase before we focused in on specific assets and John can give you more flavour on the specifics.

John Hines

I guess I would only add one thing in that. The size of transactions often times equate to complexity which takes translates in to duration.

Operator

We will go next to Chris Ellinghaus with Williams Capital.

Chris Ellinghaus - Williams Capital

I presume I have got a whole laundry list of question, I presume towards back end of the queue, so I will ask a bunch. First thing Bob; going off for something you were talking about in the gas settlement, it certainly seemed like an overall fair kind of number, but can you talk about your argumentation before the commission and may be what the commissions’ attitude and response was on the ROE. Did you make a clear to them that a 10% ROE is kind of a floor for a lot of investors at the screening mechanism and if that’s potentially hurtful for raising equity capital and can you just give us a little color on that?

Bob Rowe

Yeah, we did explain that at some length in our free filed testimony. We were very concerned about that aspect of investor reaction and entering into the stipulation we have that mind. We were frank I think at explaining the likely concern to the commission. The commissioners individually ask good questions from really all perspectives about the implications of the stipulation, and ultimately we concluded that at this time the overall revenue increase which we agreed upon ROE was an acceptable outcome. All parties gave something and we were able to move forward on that basis, but we get it in terms of concerns that investors may have about that ROE on the gas side.

Brian Bird

Hey, Chris one thing I will add to that. On the gas side we’ve probably noted that ROEs have trended down more than they have on electric side and I think its 25 basis points or the likes. So from our perspective on the electric side our lot ROE are still in the appropriate range we believe and tend to turn the quarter depending on the assets.

Chris Ellinghaus - Williams Capital

Okay, I was going to ask you presuming that there is a Montana Electric case in the not too distinct futures, can I presume that you will go back to that issue because particularly for some long only investors that is an important criteria and it would be nice to see the electric side be a little bit different?

Brian Bird

We as Bob pointed out certainly noted in my testimony, noted to understand numerous times how important it is and that 10% is a certainly received for by investors and also it's done by electric case will be at a certain, it will be included in our testimony again trust me.

Chris Ellinghaus - Williams Capital

Okay. Brian can you talk about the weather impact this quarter and I'm just sort of looking through the drivers for the quarter, you know obviously retail electric and gas and transportation and storage are things, can you talk about transmission, is that largely weather related and I'm particularly surprised by the gas production incremental benefit for the quarter, is that also somewhat weather and consumer demand oriented?

Brian Bird

I'll start with on the electric transmission side, a lot of that has to do with improvements in wholesale prices elsewhere, that's allowed us to draw more you know generation through our transmission system as a result to meet the needs of higher wholesale prices if you will. On the production side, I think from that matter we just drew upon more gas from our production facilities for the quarter, as a result had a little bit higher margin or thought as you might also know a little higher production costs as well.

Chris Ellinghaus - Williams Capital

And so can we presume that that significance in the quarter is really of a seasonal nature due to winter demand?

Brian Bird

Say that again Chris

Chris Ellinghaus - Williams Capital

Well, it’s a very big number, certainly much more than I would have expected given that those assets are already recovered through the fuel costs. So I'm just curious whether because the first quarter is such a big gas quarter whether the earnings from your production assets are extremely seasonal in nature?

Brian Bird

Oh, yes, yes indeed.

Chris Ellinghaus - Williams Capital

Okay. And also the repairs deduction was particularly beneficial, what was going on in terms of maintenance that might have led that to be so large?

Brian Bird

Well, I think as we pointed out, I think as we mentioned in our earlier comments we just had higher investment and you are starting to see that as you know we are ramping up certainly in DSIP in the first quarter and year-over-year basis and that incremental investments that we've talked about repairs deductions in the past as we continue to invest more of our business that repairs deductions will increase.

Chris Ellinghaus - Williams Capital

Okay. The pension benefit, was that on track for pretty much what you are expecting for the year and is there any kind of seasonal nature to that at all?

Brian Bird

No, it’s in line with expectations.

Chris Ellinghaus - Williams Capital

Okay. And one last thing Bob, you were talking about the new gas plant for Montana, can you just go through the thinking of waiting until ’18 for a new asset as opposed to trying to get that to line up a little closer with PPA explorations?

Bob Rowe

That's the point at which the plant as opposed to market becomes the most cost effective option and John manages the planning and procurement process. So you can again provide some more detail there.

John Hines

Yes, part of the issues that we are looking at greenfield as well as Brownfield sites and there would be infrastructure development necessary as well as just the plant itself on both the potentially from electric transmission side and the natural gas pipeline side. So we think that's a very realistic timeframe and we can stagger our purchases accordingly to meet that timeframe.

Bob Rowe

In the 11th plan, 18 was identified, 20 at which own new generation was the most sensible alternative.

Chris Ellinghaus - Williams Capital

And one more thing Travis, if you get a chance, would you give me a shout later?

Travis Meyer

I will do that, Chris.

Operator

Our next question comes from Wells Fargo, Jonathan Reeder.

Jonathan Reeder - Wells Fargo

Good afternoon, gentlemen. Most of mine have been answered but a couple timing questions. Bob, you mentioned on the FERC decision on the Dave Gates station as just in 2012. Does that mean, you are no longer thinking Q2 that it could be kind of second half of the year?

Bob Rowe

I think that’s fair and I am trying to communicate the black box nature of when a decision might be forth coming. Everything that we know the possible timing of the decision is simply based on how long it typically takes matter to about to be decided once it is taken from the AOJ level up to commission level. The factors here, we talked about these before. The importance to the industry is indicated by the third-party filing from VI and BPA for example, that grew of course with oral arguments and things like that but we have no insight into when a decision might be forth coming little with best practice.

Jonathan Reeder - Wells Fargo

Okay. But I guess something in the past practice made you kind of alter the thought from Q2, I mean is that others do it really?

Bob Rowe

Really, we’re now well into -- we’re into five year term, I wouldn't read anything into weather or say we are telling you I mean we know and the terms of what are decisions forthcoming very much.

Jonathan Reeder - Wells Fargo

All right, fair enough. And then with the expected South Dakota electric rate case filing getting push back to 2014 from mid-year this year, should we assume that it's early in ‘14 or is that still kind of up to debate?

Brian Bird

I think (inaudible) John is we will do what we do at all of our jurisdictions, we do what we call a first look after we get our year-end results and we start to calculate a known and measureable. So we will go strictly as we can and my expectation would be in the first half of ‘14.

Bob Rowe

The first the gating action is the assessment of whether or not that case needs to be filed.

Jonathan Reeder - Wells Fargo

Okay. And then any clarity on when we might see Montana electric case?

Bob Rowe

Same answer there as well.

Jonathan Reeder - Wells Fargo

Okay. And then just last question besides the tax rate, have any of the other assumptions materially changed since you establish the 240 to 255 guidance range?

Brian Bird

No, I think all I say on that is obviously we are pleased where the tax rate is in our range, but there is some timing in terms of expenses and things that drag things and I will just say we are very comfortable with the arrangement.

Jonathan Reeder - Wells Fargo

Okay. I appreciate the time guys.

Brian Bird

And one other things back to comments associated with timing in on ’14, I think we should be clear on the rate cases of two things, one on the South Dakota side we really have been ramping up spending and based on coming in ‘14 and that is going to be a big driver too, I think really pushes over the edge if you will. And obviously in Montana on electric side DSIP with $50 million more spend if you will is going to really drive that for next year, so very certain in terms of what ‘14 is going to show for both Montana and South Dakota.

Jonathan Reeder - Wells Fargo

Right. And that's what I was kind of thinking as far as the DSIP on the Montana side, so I appreciate that additional color Brian.

Operator

Your final question will come from Andrew Levi with Avon Capital.

Andrew Levi - Avon Capital

Hey, good afternoon. I guess most of the questions were asked. The only one I have left is, are there power plants actively being marketed in your area?

Bob Rowe

Time, there have been plants, shop, we yet comment on anything beyond that and that’s all we know.

Andrew Levi - Avon Capital

Okay. So you can let us know whether there is actual, you know now obvious (inaudible) but whether there is any activity of plants that are, I don't know if it’s been made public or not made public but they are going to be marketed?

Bob Rowe

No.

Andrew Levi - Avon Capital

Okay. Thank you very much.

Bob Rowe

Thank you.

Operator

And we have no further questions in the queue.

Travis Meyer

All right, well, thank you everybody for joining us and I will let Bob sign off here.

Bob Rowe

Again thank you very much. We will see many of you during the quarter and look forward to talking to most of you next quarter. Take care.

Operator

Ladies and gentlemen, that does conclude today's conference. Thank you all for joining.

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