NorthWestern Energy Group Inc (NWE) 2015 Q4 法說會逐字稿

Welcome to the NorthWestern Corporation year-end 2015 financial results conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Travis Meyer. Please go ahead, sir.

Thank you, Jessica. Good afternoon. Thank you for joining NorthWestern Corporation's financial results conference call and webcast for the year ended December 31, 2015. NorthWestern's results have been released and the release is available on our website at northwesternenergy.com. We also released our 10-K pre-market this morning.

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

Before I turn the call over for us to begin, please note that the Company's press release, this presentation, comments by presenters and responses to your questions may contain forward-looking statements. As such, I'll remind you of our Safe Harbor language.

During the course of this presentation, there will be forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often address our expected future business and financial performance and often contain words such as expects, anticipates, intends, plans, believes, seeks or will. The information in this presentation is based upon our current expectations of the date hereof unless otherwise noted.

Our actual future business and financial performance may differ materially and adversely from our expectations expressed in any forward-looking statements. We undertake no obligation to revise or publicly update our forward-looking statements or this presentation for any reason. Although our expectations and beliefs are based on reasonable assumptions, actual results may differ materially. Factors that may affect our results are listed in certain of our press releases and disclosed in the Company's Form 10-K and 10-Q, along with other public filings with the SEC.

Following our presentation, those who are joining us by teleconference will be able to ask questions. The archived replay of today's webcast will be available beginning at 6:00 PM Eastern time today and can be found on our website at northwesternenergy.com under the Our Company, Investor Relations, Presentations and Webcasts' link. To access the audio replay of the call, dial 888-203-1112, then access code 391-8049. Again, that is 888-203-1112, access code 391-8049. I'll now turn it over to President and CEO, Bob Rowe.

Thank you, Travis. Up until the call started, Travis was referring to Brian and me as his minions. So, you can ask him later what that was all about. I'll start with just a quick summary of some activities, hand it off to Brian for the in-depth financial report and then come back and provide some more color on other things going on.

So, some highlights, first of all, 2015 net income improved by $30.5 million compared to 2014. That improvement was due primarily to a full year of hydro operations and insurance recovery received in 2015. But this was partially offset by the inclusion of an income tax benefit in our 2014 results, due to the release of what had been previously unrecognized tax benefits and warm weather, which reduced our margins in 2015.

We had $3.17 in diluted EPS in 2015. That's compared to $2.99 in 2014 for a 6% improvement. Meanwhile, non-GAAP adjusted EPS of $3.15 was a 17.5% improvement over 2014 non-GAAP adjusted EPS of $2.68. We're within the 2015 EPS guidance range of $3.10 to $3.25.

In October, the South Dakota Public Utilities Commission approved the settlement that we had reached with the PUC staff and intervenors providing for an increase in base rates approximately $20.2 million. That was based on an overall rate of return of 7.24%. In addition, the settlement allows us to collect approximately $9 million annually related to the Beethoven Wind Project, which we acquired in September of 2015.

At our just concluded meeting, the Board approved a 4.2% increase in our quarterly stock dividend, $0.50 per share is payable on March 31 of 2016. Brian, off to you.

Thanks, Bob. On page 5, again, summary financial results, first and foremost, as Bob pointed out earlier, net income was $151.2 million versus $120.7 million in 2014, that's a $30.5 million increase or a 25% increase. Diluted EPS $3.17 versus $2.99 or an $0.18 improvement and 6% improvement as well. That's at a very high level.

Moving on to gross margin on page 6, basically two different stories. Our electric business did extremely well and offset by warmer weather impacted our gas business. But at a high level, gross margin was up $119.1 million or 16.5%. On the electric side, margin was up $133.7 million or approximately 25%. On the electric side, that was primarily driven by our hydro operations, $135 million of improved margin there.

In addition to that, we had a South Dakota electric rate increase that was offset to a degree by electric QF adjustment and lower electric retail volumes during the year. On the gas side, as I mentioned, gas was actually, production was down $14.6 million or 7.6%. That was primarily driven by natural gas retail volumes being down substantially about $10.8 million there. Also our gas production rates and deferral were impacted as well.

Moving forward, regarding weather -- 2015 weather, just talking about that as a whole, I think people know that our business, we have variability, if you will, in our earnings, primarily in the first and fourth quarter is driven a lot by our gas business and what happens with heating degree-days. On this chart, you can see from a heating degree-day perspective, we were quite a bit warmer versus 2014 and also quite a bit warmer versus a historic average.

As you may know that we impact -- move from GAAP earnings to non-GAAP earnings make an adjustment and we did add back for the year $0.17, as a result of that warmer weather over the year. That broke out $0.09 in the first quarter, $0.06 in the fourth quarter. And even -- we have some heating degree-days -- of course, in the second quarter that also had a $0.02 impact there to equate to the $0.17.

Just a little more color there, you may also notice that we did have a bit warmer summer but that had very little impact on our business. I think if you look at the amount of heating degree-days we have versus cooling degree-days in Montana -- we have 19 times more heating degree-days than cooling degree-days and 9 times more in South Dakota. So, certainly, our heating load has a significant impact on our business and thus, warmer weather also had a significant impact on our margin.

With that, I'm going to move forward to operating expenses. The good news here from an operating expense standpoint, even though our operating expenses were up as a whole, $31.3 million, that was only a 5.8% increase and again compare that to the 16% increase in margin.

One of the reasons for the lower increase for expenses was that the operating and general administrative expense line item actually -- that line item, expenses were actually down. What really drove that, as Bob mentioned earlier, the insurance recovery is one of those items, nearly $21 million. But also we had hydro transaction costs in 2014 that we didn't incur in 2015.

As a result of lower share price in the [year-over-year] basis, we had lower non-employee directors deferred comp that reduced our operating and general and administrative expenses, but I think as everyone knows that item is also offset in other income. Those favorable variances were offset to a great degree by hydro operations expenses, up $33.2 million on a year-over-year basis. We did have higher employee benefit compensation costs, primarily in medical benefits.

If you take those two groupings, those favorable items I talked about, approximately $35 million of a benefit and then the hydro and employee benefits, that's about $37 million detriment. Net-net expenses would have went up about $2 million just taking those into consideration. So, these other times we mentioned, equate to approximately $10 million. I just ultimately lump it in the category of favorable cost control.

I think the Company did a nice job understanding the impacts of weather, really starting the first quarter, worked very hard during the year to manage its cost structure. So, net-net operating and general and administrative expenses were down $8.4 million or down 2.7%. Property taxes, depreciation and depletion, however, they were up $18.8 million and $20.9 million respectively. But also approximately 16% up in each of those categories, again, in line with what margin did for the year.

Moving forward to operating income, taking those factors into consideration, talked about margin expense, operating income was actually up $87.8 million or just over 49%. Below that, interest expense increased by $14.4 million. Nearly all of that attributed to the hydro incremental debt as a result of the hydro transaction.

Other income actually was down $2.6 million, primarily driven by, as I talked about, the deferred -- non-employee directors deferred comp adjustment, that's where it's offset up in expenses. That was partially offset by higher AFUDC on a year-over-year basis. That leads us to income before taxes, up $70.8 million or 64% on a year-over-year basis. Then lastly, talking about income taxes, income taxes are $40 million higher on a year-over-year basis. I really would lump those really into two buckets.

We did have higher pre-tax income on a year-over-year basis that really drives about $25 million of that $40 million variance. We also had, in last year, we had prior year tax adjustments that were favorable to us. Those equated to approximately $18 million. So those two represent the lion's share of those variances. So, our tax rate in 2015, 16.6% versus in 2014 a negative 9.3% or a 9.3% benefit in that year. All in all, as we mentioned earlier, net income up $30.5 million, with a 25% increase on a year-over-year basis.

Moving on to the balance sheet on page 10, very quickly, nice improvement in PP&E. Up 8% over 2014, primarily driven by our acquisition of the Beethoven Wind Project and other investments in our system to improve safety, reliability and capacity. Also, we had a nice 8% increase in shareholders equity on the balance sheet.

Lastly, I'd point out, ratio to debt to total capitalization is a means for us to, at a very high level, to clear our credit metrics. We did see an improvement on a year-over-year basis, but we are at the high end of our 50% to 55% debt to cap limit at this time.

On a cash flow slide, main thing I'd like to speak to here is, we had a $90 million improvement in cash flow from operations, primarily driven by the improvement in net income and improvement in some non-cash adjustments -- think depreciation. Those are the primary drivers and think also, primarily driven from the hydro transaction. That $90 million improvement in cash flow from operations was clearly enough to help us cover incremental additions to PP&E that we did on a year-over-year basis and also to cover our dividends.

We did make an acquisition, we talked about Beethoven as we see that in there. But that was primarily financed by issuance of common stock and our borrowings during the year. The other thing I'd like to point out on the cash flow slide, you may have noticed that as a result of Beethoven PTCs and primarily the bonus extension, that those two things will allow us not to be a non-cash taxpayer into 2020.

Moving on to non-GAAP adjusted EPS, for the fourth quarter, our GAAP diluted EPS was $0.92. That was a slightly higher than the $0.85 from the prior year from a diluted EPS perspective. We did add back $0.06 of unfavorable weather to get to an adjusted $0.98 on a comparative basis versus $0.89 in diluted EPS for the fourth quarter of 2014.

On a full year basis, if we did have GAAP, diluted EPS at $3.17. That was 6% higher than the GAAP diluted EPS of $2.99 from FY14. We did have several adjustments during the year, I mentioned the $0.17 of unfavorable weather that we did add back. We did remove the insurance settlement and then we did add back the QF liability adjustment. Those netted to a $0.02 reduction. So on an adjusted, diluted EPS of $3.15, that's a 17.5% improvement over $2.68 from the prior year.

A little more detail on page 13, non-GAAP adjusted earnings. Obviously, a chance to take a look at these slides in more detail. I would have you focus on the green box at the bottom of the page. We do show down there the 17.5% improvement of diluted EPS on a year-over-year basis, so an adjusted basis. But also very nice improvement in pre-tax, after all of the adjustments for 2015 and 2014 of 55% and net income of 42.5%.

Regarding 2016 earnings guidance, the diluted earnings per share range of $3.20 to $3.40 has not changed since the last time we shared our guidance. Primary drivers for that guidance, of course, normal weather, excluding any impact associated with anything happening with the Dave Gates Generating Station and our FERC decision associated with that. We did adjust our income tax rate to a range of 9% to 13%. We do have a share count of 98.5 million on a going forward basis.

We think as we look at our past performance and look forward into 2016, we continue to target a 7% to 10% total return for our investors. I would also point out that the $3.15 of adjusted earnings was within both our original and our revised earnings guidance for the year, our revised at $3.10 to $3.25. So, with this, we're able to deliver on our guidance for the year.

Moving forward to slide 15, which gives a bridge, if you will, from that adjusted diluted EPS in 2015 of $3.15 up to the midpoint of the $3.20 to $3.40 or $3.30 midpoint that we show there. The primary movers, of course, I'll talk about at a very high level, gross margin improvement -- pretty sizable gross margin improvement, primarily driven by a South Dakota rate case, a full-year benefit of that, by the way. Beethoven as well and load increases in both gas and electric on a year-over-year basis, offset to a degree by the Kerr costs that we recovered up in margin going away in 2016 and also the elimination of LRAM that occurred. So we will not have any of that in 2016.

On OG&A expense increases, slight increases on a year-over-year basis, certainly a full-year cost of Beethoven and inflationary costs for all of our business, but those are also offset by Kerr expenses that will be going away in 2016. Think property tax, depreciation, interest expense going up of course, as we continue to grow the business. As we footnote on this slide, we certainly show incremental tax benefits. As I talked about earlier, the Beethoven production tax credits, bonus depreciation and increased repairs tax deduction. With that, I will pass it back over to Bob.

Thank you very much, Brian. I'll start with a little discussion of the hydro system. As you know, 2015 was the first full year of operation of the hydro system and despite some pretty dry weather, we hit right at our targeted production based on the five-year historical average. That really was an indication of the benefit of the diversity of our system.

One of the presentations to the Board of Directors actually was from one of our senior project engineers in hydro and among other things, he was explaining and discussing the way operation at Hebgen, if you have the map in front of you, which is the first dam on the Madison and Missouri system, really produces benefits all the way up the other Madison and Missouri dams. So it's a resource that is renewable but it is also recyclable from one facility to the other. Again, that's showing the benefits of the integrated system.

We've talked before, our supply department will be releasing the next Montana electric supply plan by the end of the quarter. One of the important parts of that will be an asset optimization study focusing on hydro and integration but then more broadly concerning optimization of the entire Montana generation fleet.

As you know, we had an awful lot of skin in the game in terms of operating the Kerr Dam, which was part of the conveyance from PPL Montana Talen, with the understanding that under a prior FERC decision, it would be transferred to the Confederated Salish and Kootenai Tribes. I didn't know the exact date but ultimately that transfer did occur on September 5.

The Montana Commission had been very clear in its order approving the hydro transaction. First of all, quite honestly, there would be no shareholder benefit in terms of either depreciation or a return on the Kerr part of the transaction and conversely, there would be no customer risk. In fact, we were quite pleased to be able, at the time of the conveyance, to show a net customer benefit over that time of about $2.7 million.

As we were required to do under the initial hydro order, we did file a compliance filing in December of 2015 removing the Kerr project from the hydro cost of service and then at the same time, removing the Kerr benefit making adjustments to actual taxes and then truing up the interim order on the compliance filing as a rate effective date in February. So there is some lag and there will be a true-up associated with that.

The last thing I would say about the hydro system, I think I pointed this out on our last call as well, but it's worth reminding ourselves of, is that Talen in October announced the sale of 292 megawatts of hydro for $860 million, which would be about $2,945 per kilowatt. The purchaser there was Brookfield Renewables, an active participant in this space. The cost was essentially 49% higher than what we paid for, the 439 megawatts of hydro that we purchased net of Kerr for $870 million.

So, the October 2015 transaction had $2,945 per kw compared to our $1,982 per kw. So again, more evidence that I think we got a great, great asset at a very good price for our customers.

Turning to some of the positive things happening in South Dakota, first the Beethoven Wind Project. In September, we completed the purchase of the 80 megawatt Beethoven project near Tripp, South Dakota for about $143 million, in a transaction with BayWa r.e. Wind LLC. The South Dakota Commission granted approval of our request to place the assets into rate base using a three-year levelized rate calculation.

The financed project was $70 million in 25-year bonds at 4.26% and then $57 million of equity issuing 1.1 million shares at $51.81. Had a successful outcome, I think all around, in the South Dakota rate case from a customer perspective and from our perspective. In October, the South Dakota Commission approved the settlement agreement we reached with the South Dakota staff after thorough and extensive discovery, providing for an increase in base rates of about $20.2 million. That was based on an overall rate of return of 7.24%.

In addition, the settlement allowed us to collect -- will allow us to collect about $9 million annually related to Beethoven. We anticipate net income to increase by about $13.6 million in 2016, as a result of the full-year impact of the rate adjustment and the Beethoven acquisition.

Concerning transmission, effective October 1 of last year, we're now a transmission owning member of the Southwest Power Pool for our South Dakota transmission operations. Marketing activities in SPP are handled for us by a third-party provider who acts as our agent.

Upon entering SPP, we of course exited out of MAPP, which had been our transmission planning region. We're very engaged in the activities in the Southwest Power Pool. So far I think we like what we see.

The energy -- the owned and rate based cost of energy from the Beethoven Wind project over the next 20 years is expected to be about $44 million, a $25 million NPV. That's less than what the amount of PPA alternatives would have been. So, again, we were able through this transaction to show a very clear benefit to our customers.

I could probably spend a little bit less time on the EPA Clean Power Plant that I would have two or three days ago, but it is still notable. We are still paying attention to it. I'm going to spend just a minute on slide 18, because it does highlight I think the real virtue from a carbon perspective of our Montana portfolio and specifically, the hydro acquisition. That's important regardless of final disposition of the EPA rule.

If you spend just a minute looking at this slide, left axis pounds of CO2 per net megawatt hour of generation. Then years along the right axis. The dotted green line trending down was the original EPA rule. We refer to that as the glide path. The sharp green line heading down to actually a lower end point in 2030 was the EPA final rule. The aqua colored line at the bottom is the carbon intensity of our Montana portfolio, thanks to the hydro acquisition.

So what's important is that our portfolio in Montana is actually cleaner from a carbon perspective than the EPA -- what had been the EPA target for the state of Montana in 2030. Whether the EPA rules are or are not in effect that is, I think, extraordinary good news.

As many of you know, turning to page 19, the EPA final rule had set a 47% reduction target in Montana. That, I think, was causing tremendous concern by most of the business and public leaders in the state of Montana. We had participated in litigation, as had the Attorneys General in both South Dakota and Montana. We had also filed a request for reconsideration with the EPA, making the point that we had not had -- because of the dramatic change from the initial to the final rule, we had not had the opportunity to comment on the final rule.

We do still hope that the EPA will take the opportunity to look carefully at our request for reconsideration. We were also working, again, in both South Dakota and Montana with other parties on compliance plans, probably going through the important steps to obtain a two-year extension, that appeared to be the directions that the states of South Dakota and Montana were both proceeding.

With the Supreme Court's 5-4 decision, the rules are stayed and our attorneys point out that first of all, this was a historic decision by the Supreme Court staying agency rules at this stage. Secondly, that the stay would remain in effect until the entire litigation process is concluded, rather than just sending that back to the court.

Various scenarios over how long the litigation will take -- obviously, the circuit court will be moving ahead quite expeditiously. But there are scenarios that suggest this could take two full years. Given that we believe our portfolio is of high quality and it's clean, given that we've made investments to the benefit of our customers, we think this is a good outcome and certainly doesn't affect our commitment to providing a clean and diverse and reliable and affordable portfolio for our customers.

A couple of other activities to highlight on the environmental front again, the Big Stone Air Quality project. As you know, at Big Stone, we jointly own -- we own 23.4% of the Big Stone plant, which is subject to best available retrofit technology requirements of the Regional Haze Rule. The project was to install and operate a new system to reduce both SO2, NOx and particulates.

We ended up capitalizing about $98 million for our share of the project. It was a very well conducted, well executed project. As we informed the Commission of the project over time, that was, I think, quite clearly recognized at the South Dakota Commission. The project ultimately was completed and placed into service on December 29.

As many of you know, we've had a very sharp focus on our distribution and transmission investments. The distribution system infrastructure plan is ongoing. We're really a little over midway through that. Our customers are seeing the benefit of that.

Then parallel to that is ongoing work on the transmission side. We described for some time our intent has been to essentially combine those efforts into an end to end electric and gas infrastructure program.

We've now kicked off our Infrastructure Stakeholder Group, which has now met twice. Our next meeting, in fact, will be next week at our new general office in Butte. It's really a blue ribbon group of business leaders, civic leaders, public sector leaders focused on infrastructure and chaired by the Chancellor at Montana Tech, Don Blackketter.

What we used to think of as our programmatic transmission and distribution investments on top of our base budget over the next five years are anticipated to be about $360 million. So this is very important to ensure the long-term adequacy of our system for our customers.

We always do touch on natural gas reserves. I wish I had breaking news, but I do not. We currently own 27% of our retail loads about -- of our annual 20 BCF annual retail gas loads. About 21%, but including another 5 BCF that we use for electrical generation, including at Dave Gates. We've invested about $100 million through December of 2014. We think, a good position for us to be for our customers, would be to own about 50% of our needs, taking advantage of current low gas prices.

We estimate that, again, at current prices that could require additional investment of $50 million to $100 million to reach our goal. However, as we have discussed previously, at current low prices, we are not able to find sellers who are willing to transact.

A note on news concerning Dave Gates Generating Station, which is to say that there is no news concerning Dave Gates Generating Station. We, as you know, there was a decision in April of 2014, which allowed us to recover on the FERC side as opposed to the state side, only a fraction of the cost that we believe we are incurring to serve our FERC jurisdictional customers.

That has resulted in about an $8 million annual under-recovery. The request for rehearing is still pending. We have deferred about $27.3 million of revenue. At some point, we will receive word concerning the request for rehearing. From what we understand, it's not unusual for this kind of very long dormancy periods to exist. Although, I also understand that Chairman Bay is focused on trying to clear a lot of the backlog, including the backlog in this area.

A couple of highlights for 2015, it was a strong year for safety. I can't say that it was a great year because we had a fatality. That really overshadows everything else. But it was the fewest OSHA recordable events of any year. It was one of our very best years for lost time incidents, which are two of the three measures that we track on safety. Our employees have really shown a great commitment to safety.

Next, we had record best customer satisfaction scores with JD Power. That's something we're very proud of and committed to. Next, we, just a few days ago, received word from Cogent Reports, which runs quite a rigorous survey in some ways similar to JD Power. That we are a Residential Utility Customer Champion. That's based on 50,000 utility customer interviews to identify leading utility brands based on trust, product excellence and operational satisfaction.

Very importantly, I think to this audience, as you know, we were recognized for the Corporate Governance Award Winner recognized for our proxy statement as the top award for exemplary proxy statement disclosure from the New York Stock Exchange Governance Services.

Finally, we opened our new general office in Butte, Montana just over the last few weeks. It is not a Taj Mahal but it is a very efficient, very functional building that is providing a great investment in an historic part of Butte. I'm going to quote one of our senior, very respected, engineers just walking out the door one night who said, thank you for providing a facility where we can indicate a respect for employees, so we can do our work as professionals, serving our customers. That really, I thought, said it all.

Turning to our capital forecast, as you know, as we depict this forecast, it tends to ramp down in the out years because we are depicting the investments that we know. So here you see Montana and South Dakota Electric, Montana and South Dakota, Nebraska Gas. Our current cumulative capital spending for 2016 through 2020 is $1.47 billion. We anticipate being able to fund these capital projects with a combination of cash flows aided by the availability of NOLs, which we now anticipate to be available into 2020 and then also long-term debt.

Very much as with the Beethoven project, if other opportunities arise, they're not included in the above projections: natural gas reserves, peaking other possible acquisitions, new equity funding might be necessary. So through 2015, despite some significant challenges and quite a lot of risk around things such as Kerr was a good year and a busy year, I think laid a great foundation. So in 2016, we're probably just putting our feet up on the desk and relaxing or not.

So what to anticipate this year? First of all, from your perspective, a full year of South Dakota rates in place including Beethoven. We anticipate net income to increase by about $13.6 million this year as a result of the first-year impact of that rate adjustment. Again, as I mentioned, the Air Quality Control system at Big Stone was successfully placed into service at the end of December.

Things we're working on, I mentioned first of all the Infrastructure Stakeholder Group. This is an effort that we take very seriously, as we consult with our customers and stakeholders to plan the system that serves them. They will be meeting monthly through 2016.

A couple of important transmission projects. First of all, you may be aware of some of the really extraordinary growth in the Bozeman and Big Sky area. This will be the final year of a very challenging and important transmission project through a mountain corridor to upgrade service into that rapidly growing area. That has been a 37-mile upgrade through a narrow canyon, total project cost about $46 million.

This project, it is also the foundation for both transmission -- transmission substation distributional work in the Big Sky area. Then very excitingly, this will be the first year of actual construction on a new $47 million transmission line, the Carbon-Stillwater line. You can think about this as being west and south of the Billings area, also quite a mountainous area. This will be to serve our customers including industrial customers and our co-op customers in the Columbus-Absarokee-Red Lodge area. That's scheduled to be completed in 2017. Our lands and permitting folks working with transmission have done a really great job laying the foundation to move to actual construction.

Our Montana electric supply resource plan will be filed by the end of this quarter. As we've talked about, that's a very important document, where we will lay out the foundation for operating a diverse energy portfolio in Montana, with a particular focus on how we will meet our capacity needs going forward -- alternatives to meet our capacity needs and again to optimize operation of the system for the benefit of our customers.

I mentioned the hydro compliance filing was made in December of 2015. There is not a procedural schedule out yet. We expect that soon. The interim rate will be effective this month.

Again, I mentioned the Supreme Court's stay of the Clean Power Plan but nonetheless our ongoing work with other stakeholders on environmental efforts overall. As we say every year, we will be evaluating our need for any rate filings and anticipate providing you with an update on our first-quarter earnings call, which will be in April. With that, Travis' minions are available to answer your questions.

I may be looking for a job soon. (laughter)

Not at all. (laughter) Travis does a fantastic job, as you all know.

Jessica, we can open it up for questions.

(Operator Instructions)

We'll now take a question from Dan Eggers with Credit Suisse.

You covered most everything, but just a couple follow-ons, one on the 2016 guidance. You guys use normal weather. It's been obviously very mild in the Northeast. How are you guys shaping up on weather obviously a month in? Is that anything we should be keeping an eye on already?

Yes. I would just say that January wasn't as good as we'd like. You can follow-up on heating degree-days there. We've already taken that into consideration in our planning for 2016.

Okay. Question number two, Beethoven was one of those nice surprises that came through last year with the tax extensions for solar and for wind. Are you guys seeing any need or any opportunity maybe to add some more renewables this year or next year?

Honestly, no. That's something on the Montana side, we'll certainly address in our plan. If there are opportunities to, in any way, reduce costs to customers as we did at Beethoven, we're certainly going to look at that. Our plan is going to focus on the capacity needs. In Montana, we're part of the Pacific Northwest, one of the interesting things there is the Northwest Power and Conservation Council is taking comments on its most recent regional plan. We look a lot like the Pacific Northwest in focusing on strategies to meet those capacity needs.

So is that along the lines of maybe some gas generation or some peakers just for diversity and some responsiveness? Or what are you thinking?

Dan, I'd say this. I think we've talked about having peaking needs in South Dakota and Montana on a going forward basis. I think we will get into more details in that when our plan is released at the end of the first quarter. We'll certainly put more clarity around that.

What you'll see in the plan, it's a comprehensive and very robust document, our supply department runs multiple scenarios. Again, the point is to meet our customers' needs in the most reliable way and cost effectively.

Just to clarify, that is or is not included in the CapEx numbers in your slides today?

(multiple speakers) It is not included. Yes, It is not included. Once we identify the timing and the dollar amounts associated with projects like that, we put that in our CapEx, Dan, but certainly in our 10-K. If we don't know the timing and amounts, we don't include those in the plans. We note that in our 10-K that most types of things aren't included and certainly, in our Investor materials as well.

Okay, thank you guys.

Our next question will come from Chris Ellinghaus with Williams Capital.

Bob, you were talking about hydro and the drought conditions. Have you guys given any thought to what kind of upside to hydro operations you might see; however, you might want to define it, gross margin or whatever, under more normal hydro conditions?

Sure. We plan based on five years of actual performance. We've seen -- for last year that really pretty well nailed it. We don't know what likely performance will be during the year until later in the spring. For example there, in Montana, quite often there will be late snow and spring rains. There certainly is some upside in how we operate the system, but also it's significant -- this will be discussed in the plan, there is unutilized capacity at a number of the dams, where if it made sense, if it were cost-effective, we could add generation to existing dams.

Okay. Brian, this question is for you. On page 6, on the reconciliation for the year, I'm a little bit confused on the hydro transaction costs that you specify are $9.5 million pre-tax, $5.8 million after tax. Are you trying to tell us there, that there were some lingering transaction costs in 2015?

No, those are -- we're saying on a year-over-year basis, we had no cost in 2015. Those were costs in 2014, thus the favorable variance in 2015.

Yes, that's where I'm getting confused because I thought the after tax hydro transaction costs and whatnot from 2014 were like $9.5 million after tax.

No. They're pre-tax, Chris.

Okay. Thanks. Lastly, can you give us any color on your efforts for pursuing optimization of DGGS?

That's something that, again, will be addressed as part of the plan. So stay tuned there.

Okay. So that would get addressed in the IRP?

Yes.

Okay, great.

We don't refer to it as formal IRP. It's the Montana electric supply plan.

Right. Okay. Thanks a bunch.

Hey Chris, just one item. On that -- on the $9.5 million, one thing you might be thinking about, this is the operating expense. We also did have last year bridge fees, which were down in interest expense associated with the hydro transaction.

Got you. Okay.

You might be looking at the two of those together on an after tax basis, is probably around the $9.5 million.

Okay, got you.

That's why Brian and I are minions. (laughter)

We'll take our next question from Paul Ridzon with KeyBanc.

Brian, one of the things you mentioned at the beginning of the call was, I think, a headwind from a gas deferral after reserves. Can you give some more flavor of what that is?

Yes. We -- one thing, Paul, is we've had these gas production assets for some time. They've been flowing through a tracker; right? Those assets had to have been put into rate base. As we've gone through the gas tracker hearings and there was an agreement that ultimately those costs, we would reduce what we receive on a cost to actual cost levels. So that's what we deferred down to our actual cost levels on gas production asset.

How much was that?

$1.9 million.

Then I guess in the last six months, we've seen an equal number of M&A deals, just wondering how you're thinking about scale and synergy opportunities against the backdrop of very cheap financing available?

I think you know our usual answer, which is we don't comment on M&A. We've got plenty to keep us busy. When we do pursue opportunities, we, as we were with hydro, we try to be pretty disciplined.

Okay. Thank you.

Thank you.

We'll now take a question from Brian Russo with Ladenburg Thalmann.

Can you just add a little bit more color on bonus depreciation and the fact that you guys use flow-through accounting? Is there any adjustment to your rate base? Or it just kind of flows through the effective tax rate?

Yes. Brian, it's a difficult concept to explain, but as you know, those utilities that are cash tax paying utilities, they have a -- they ultimately have the benefit of bonus. They have this incremental cash that they can continue to invest, but they also have a deferred tax liability that builds and is an offset to rate base. Our case, because of the flow-through nature of our business and the fact that we're a non-cash tax paying entity, we still create a deferred tax liability. But because we're a non-cash tax paying entity, we have an offsetting deferred tax asset. It's not necessarily offsetting dollar per dollar but relatively close. As a result, we don't have as much impact on rate bases as our peers would have.

Got it. Okay. Just to be clear, the transmission projects mentioned on slide 23, is that in your CapEx? Or is that incremental because it's things you're working on?

That is in.

It's in the CapEx. Okay. Then, just lastly, can you share with us what your earned ROE was in 2015?

Yes, Brian, I think we even gave that maybe on the last call. I think for our electric business, we provide for our Montana business -- in our Montana report for the electric business, it was 11%. For our gas business, it was approximately 8%. So our South Dakota business, we don't share that. Certainly, you guys can calculate our actual ROEs in the overall Company. So, hopefully that's helpful.

Brian, I don't know, were you asking for 2015 though? I thought I heard you asking for 2015 not 2014.

So it was actually for 2015.

That answer was for 2014. We won't know 2015 until we actually calculate our Montana annual report. That will -- we'll have that out here shortly. So, in the first quarter call, you'll be able to get that. Thanks, Travis, for mentioning that.

Okay. That 11% on Montana electric in 2014, that was helped by favorable weather; right? As well --

There are items in there that adjusted higher than our authorized rate of return. It wasn't necessarily weather, there were some adjustments in there that did actually have it higher than what we're allowed to earn.

The biggest item in there was the Safe Harbor election repairs tax benefit that we had a multi-year benefit. That was probably the biggest item benefiting that last year.

But again, 2015's results won't be available till the end of the first quarter.

Okay. Any thoughts on what ROE ranges are contemplated in your 2016 guidance?

We don't share that in our 2016 guidance. You can come up with an estimate based upon our range, if you come up with an estimated all in ROE, I presume. But we don't share what our estimated ROEs are going to be.

Okay. Understood. Then, is the loss of the LRAM revenues, is that contemplated and assumed in your 2016 guidance?

That's a good question and it is. We do not have any LRAM revenues. If you might recall, Brian, I even mentioned that, I talked about those things that would have been additive to gross margin and those things that would be -- reduce gross margin on a year-over-year basis, LRAM was one of those.

All right, great. Thank you very much.

No LRAM in 2016.

Thank you.

We'll now go to Brian Chin with Bank of America Merrill Lynch.

I know you mentioned it briefly in the prepared remarks, but could you go give a little bit more color on the repair tax deduction adjustments? How we should be thinking about that for 2016 and going forward?

I don't think I can give a tremendous amount of details there, but it does have an impact on our effective tax rate. It's an impact in terms of the benefit that we show in our earnings in our bridge, Brian. But I don't give a tremendous amount of detail in terms of what we expect repairs tax to be on a year-over-year basis.

Is there a sense of when the repair tax deduction impact begins to fall off? Can you give us some general color with regards to timeframe?

That's a very good question. We haven't provided that in the past. I'm not sure we're ready to provide that at this time.

Maybe the color we can add -- the color we can add, Brian, is we've talked about our effective tax rate being in the mid to low teens into 2017. That maybe will help you a little bit on the repairs tax deductions.

Okay. That's helpful.

I think what we probably should be able to do, Brian, as well -- we'll endeavor to do this, is we've certainly given you thoughts on how long we'll be a non-cash taxpayer to 2020. We'll endeavor to provider you ETR ranges out to 2020 as well.

Right. Got you. Okay, that's helpful. Then, I apologize if I may have missed this in your comments earlier, but I thought I saw that the CapEx numbers had ticked up in 2018 and 2019. Did you actually specify what caused that increase in CapEx outlook? If you did, I'll just go back and look at the transcript.

No, we don't. We effectively just laid out through the five-year period, but we don't give that much specificity in terms of what those items are. Part of our infrastructure plan is driving some of that of course but there are also some lumpy transmission projects that are in there as well. As we pointed out earlier in the call, it certainly doesn't include any peaking projects or any gas reserves or anything like that. It's really, invest in our existing P&D and existing supply business.

Got you. Thank you very much.

We'll now take a question from Jonathan Reeder with Wells Fargo.

Following up a little bit on Brian there. The CapEx budget, I know you said on the call, later in the period it typically falls off, goes -- you're just not as certain about some things. Should we expect a fall-off though in 2020 just from the conclusion of DSIP and TSIP plans? Or is there likely more spend along those lines to keep that portion from falling off?

The reason the plan falls off is because we're very clear to include tangible projects that we are committed to. Then if you took any five-year series and compared that one year to the next, you typically would see additional capital. But what we're driven by here is what the needs are in our system to serve our customers. What we don't include are the additional opportunities that at any given point are just that, opportunities.

I'd add to that too --this may relate back to Brian Chin's question, our capital spending forecast you would have seen a year ago, would have had less capital spend in 2018 and 2019 than we're showing now. To Bob's point, as we get more specificity around what we're doing from an infrastructure standpoint, these numbers get updated every year. I think every one of these forecasted, you've seen over the last 10 years, they do taper off in the back ends because we're just not sure what projects -- we have less specificity out in those five years. My expectation is though when we come out with our resource plan, some of this will fill in certainly in the back end, if not even in some of the front end, of this schedule in terms of capital spend. But you'll have to wait until the first quarter to see that.

Okay. So is it fair to say that the portion that right now is earmarked for the DSIP and TSIP, you would think could be replaced by either similar type spend or other kind of spend where the $300 million annually is kind of a good run rate?

Yes, I think that's a good way to look at it. If in fact from an infrastructure standpoint we find that there's a need for us to increase our spend in this, we're going to likely try to spread this plan over future years. I think you make a good point and can obviously see it in our forecast plan. We have a certain level of spend that we feel that we can take into consideration. When you take into consideration our cash flow, our dividend and everything else in taking those. So a long story, to answer your question but effectively, that's a pretty good level of spend for us. We'll try and fit within that level of spend. Things will get lumpy with acquisition and other projects, as you know. But a going forward basis, this looked like a good level spend for us.

Okay. Then Brian, I don't know if directionally you can give us some ideas where you see your operating cash flow coming in for 2016 compared to where we were in 2015?

I expect it to be slightly higher. But we don't share our budget from our cash flow perspective. You can argue that in light of our earnings growth, that's certainly going to be a driver, but other movements in the non-cash items could occur as well.

Okay. So the main driver would just be the increase kind of net income depreciation? The way you see it.

That's how I see it. But that's the specificity, you'll get out of me today.

Sure. Then last question, is it fair to say then, you're more bearish today than you were, say, on the last call in regards to -- given the natural gas reserves acquisition in the near-term? I know you're always kind of talking about the pressures but just saying that you're less optimistic today?

I wouldn't say bearish because the value is just so clearly there for customers. I will say personally, I am frustrated we have not been able to capture those opportunities because it just -- it makes so much long-term sense for customers. But not bearish and we're still actively looking for any opportunities. The other thing we have going on in the gas production that we control right now is trying to really capture the full value of those assets for our customers as well. So there's actually a lot of activity going on there.

Okay. Thanks. I appreciate the time.

John Hines, our Vice President for Supply, do you want to add some color to that?

The only thing I'd add is that there's a lot of research, a lot of looking going on, but at the prices that we're seeing right now, we're fundamentally not seeing a lot of individuals or entities willing to sell at these prices.

(Operator Instructions)

We'll take our next question from Doug Christopher with DA Davidson.

Just have a question regarding the strength of the service territory. Can you provide a little bit more color regarding some economic observation in the Montana/South Dakota area?

Yes, this is actually a good time for that. First of all, South Dakota, very strong, very steady, not rapid growth but the story has been a consistent one for a number of years. There are good opportunities in our South Dakota service territory. We work with all of the South Dakota communities through a program we sponsor, called Advantage South Dakota. A big focus of theirs is actually workforce recruitment as opposed to job recruitment. There are plenty of jobs. So slow growth, not dramatic but it's strong.

On the Montana side, we actually just got off the road, every January and February, we go out with the University of Montana Bureau of Business and Economic Research, which sponsors community economic seminars in every one of the, what we call, major cities. What was interesting this year was that in every city, even Billings, which is seeing some relative slowdown as a result of the decline in the Bakken, but still has a very diversified economy, the number one subject with the exception of Indian countries, the number one subject is workforce development and worker recruitment.

So, generally not fast growth but we are seeing new connections on the electric and gas side. It's solid and sustainable growth. The area where we're seeing dramatic growth, really almost back to the pre-recession levels, is Bozeman. We talked about the project work we have going on down in the Big Sky area. But just generally in Bozeman, it's a very dynamic part of our service territory. So I would characterize, overall, our service territory as healthy and strong with some areas of pretty significant growth.

I'd add to that, Doug, you'll see in our materials we have customer counts for both electric and gas. You can see Montana has been a bit stronger. I think of the new connected customer reports that we get, Montana's certainly showing stronger than South Dakota and Nebraska. You can see that also just by the relative customer increases we're seeing on the residential side, 1.4% growth in Montana on the electric side, 1.3% on the gas side. So pretty decent customer growth. As Bob said, some of these new connections are back to the 2007 levels, so we see that's intriguing. We're waiting to see how that translates into better volumetric growth on a going forward basis.

Thank you very much.

It does appear that there are no further questions at this time. Mr. Meyer, I would like to turn the conference back to you for any additional or closing remarks.

Thanks, Jessica. I'll pass it back to Bob.

Thank you for your interest and support over the last year. It was an exciting year for all of us at Northwestern and I think for our customers as well. Look forward to seeing many of you over the coming months and to talking to all of you after we report on the first quarter. Thank you.

This concludes today's conference. Thank you for your participation.