NorthWestern Energy Group Inc (NWE) 2017 Q1 法說會逐字稿

Good day, and welcome to the NorthWestern Corporation First Quarter 2017 Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Travis Meyer, Director of Investor Relations. Please go ahead, sir.

Thank you, Tracy. Good afternoon, and thank you for joining NorthWestern Corporation's Financial Results Conference Call and Webcast for the quarter ended March 31, 2017.

NorthWestern's results have been released, and the release is available on our website at northwesternenergy.com. We also released our 10-Q premarket this morning.

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

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 will 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 in this presentation for any reason.

Although our expectations and beliefs are based upon reasonable assumptions, actual results may differ materially. The factors that may affect our results are listed in certain of our press releases and disclosed on the company's Form 10-K and 10-Q, along with other public filings with the SEC.

Following our presentation today, 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 p.m. Eastern Time and can be found on our website, again, at northwesternenergy.com, under the Our Company, Investor Relations, Presentations and Webcasts link.

To access the audio replay of the call, please dial (888) 203-1112 then access code 9482947.

I'll now hand the presentation over to our CEO, Bob Rowe.

Thank you very much, and thank you all for joining us. I'll touch on just a couple of the highlights then will come back and go into several of these in more detail.

First, net income for the quarter was $56.6 million or $1.17 per diluted share. That's as compared with income of $39.9 million, $0.82 per diluted share for the same period last year. Non-GAAP adjusted diluted earnings per share was $1.13 as compared with $1.04 for the same period last year.

In March 2017, Moody's downgraded our senior secured First Mortgage Bonds rating to A2 from A1 and our unsecured rating to Baa1 from A3 while maintaining a negative outlook. Moody's cited weak financial metrics and a heightened degree of regulatory uncertainty in Montana as reasons for the ratings action.

The board approved a quarterly stock dividend of $0.525 per share payable June 30, 2017.

A couple words on what we've been doing. This week, we're at our office in Huron, South Dakota, at our annual meeting earlier today, were joined by our leadership NorthWestern class, as is the case every year. And these are employees from across the company who are really very engaged in learning about the company and who -- whether they're in the field, in the office, are very strong leaders and contributors to the company. It's a great opportunity for them to learn more about the company, spend time with senior leadership, spend time with Board of Directors. Had a great community event, as we always do, 2 nights ago and Sheriff Fiegen from the South Dakota commission drove several hours to get here and join us with that, had a good employee breakfast this morning with the board.

And if you look at our board, you know that we're in a very important period of renewal at the board level. We brought on just several months ago, Tony Clark, former FERC Commissioner and former State Commissioner for North Dakota. He's already adding a lot to the great board we already have in place. Dorothy Bradley, who has been a great source of wisdom and passion for our employees is retiring after over 8 years of service. And this morning, 2 outstanding new directors were elected and I encourage you to take a look at their qualifications. Britt Ide, an engineer and an attorney, lives in Montana, very active and experienced on the energy sector. Linda Sullivan, currently the CFO at American Water, but also significantly former CFO with the Edison companies in Southern California. So 2 people who bring great experience and dedication. And we all, the entire board and management team looks forward very much to working with all of them.

So with that, it's off to Brian Bird.

Thanks, Bob. On Page 5, we have the summary financial results for the first quarter. As Bob pointed out, net income, $56.6 million, which is a $16.7 million or nearly a 42% increase on a year-over-year basis for the first quarter. Fully diluted share basis, $1.17, which is a $0.35 improvement or again, approximately 42% increase on a year-over-year basis.

Drilling down on individual components on Page 6 with the gross margin. For the first quarter, gross margin was $247.5 million, a $30.4 million or 14% increase on a year-over-year basis. That increase was spread pretty well between the electric and natural gas businesses at 14.6% and 12.3%, respectively.

The 3 primary areas of increase in gross margin that actually impacts net income. In the first quarter of 2016, we had the MPSC disallowance. Not having that disallowance, of course, in 2017, that was a $10.3 million improvement on a year-over-year basis. The other 2 major improvements of $8.6 million improvement in electric retail volumes and $6 million natural gas retail volumes. Improvement, obviously, from weather and we'll talk about that in a minute, but also good customer growth. And we've seen a bit -- a rebound on both customer and industrial load as well.

Those 3 changes primarily made the change of $27.3 million in change in gross margin impacting net income. One other item to point out, we did have a increase of $3.1 million in margin associated with the property taxes recovered in trackers. Of course, that's offset in property tax expense as well. So net-net, $30.4 million increase in consolidated gross margin.

Moving on to weather on Page 7. The top right, we show first quarter 2017 as compared with both 2016 and the historical average was, as we say, normal. Versus 2016, as you can see, we were colder on a year-over-year basis in Montana, South Dakota and Nebraska. And based upon our weather analysis, that was a $10.3 million improvement on a year-over-year basis. However, versus the historic average or normal, we did have a colder Montana for the quarter, but that was offset by a warmer South Dakota and Nebraska. And that offset is primarily as a result of the size of Montana, still resulted in a favorable variance, $3.2 million, and that could all be really pointed back to a cold January in Montana.

Moving forward, on the operating expense side, operating expenses were $162.4 million, a $7.2 million increase or 4.6%. Primary movers in that or increases, if you will, were in property taxes, up $4.5 million or 12.7%, and depreciation and depletion, up $1.6 million or 4%. Again, the property taxes do have the offset in margin I spoke to earlier.

One area where we continue to -- able to control expenses to a great degree is the operating, general, administrative level of expenses, a $1.1 million increase or 1.4%. We did see some increase in maintenance costs on a year-over-year basis, a slight increase in bad debt expense, primarily driven by the increase in revenues that we saw, very slight labor increase. Those were offset by nonemployee directors deferred comp. As most of you know by now, that's offset in other income. And in 2016, we had higher insurance reserves. So net-net, again, a $1.1 million increase in OG&A. So continuing to do a good job managing our costs in the first quarter of '17.

Moving on to Page 9. Operating income, $85 million, a $23.2 million increase or 37.5%. Below that, interest expense actually went down on a year-over-year basis $1.1 million as a result of the refinancing that we conducted in 2016. Other income, however, was also down $1.6 million, almost all of that attributed to a decrease in the value of deferred shares held in trust for nonemployee directors deferred comp. Again, the offset, I mentioned, up in the operating expense category.

That led to income before taxes, $63.2 million, a $22.6 million increase or 55.7%. That leads us to income tax expense. It is up $5.9 million, primarily driven by higher pretax income. Again, leading us to the net income numbers we spoke to you about earlier.

Moving forward to the balance sheet on Page 10. The biggest change, if you will, is just from a capitalization perspective. 55% -- 55.2% at the end of December and 3 months later down to 53.9%. That's really driven by 2 things, an improvement of $33 million in shareholders' equity and a reduction in short-term debt by $72 million. So typically, what we'd see in the first quarter is an improvement there, but hopefully, we can sustain that through the remainder of the year.

Moving on to cash flow on Page 11. For the 3 months ending March 31, 2017 versus '16, you can see cash provided by operating activities, $156.8 million. That's up $14 million. And that's primarily driven all by the change in net income. Investing activities were very, very similar on a year-over-year basis. And that allowed us to have a bit more cash on a year-over-year basis to help with incremental debt paydowns and to pay the slightly higher dividend.

Moving forward to income tax reconciliation. We had a $6 million income tax increase. $7.9 million of that was driven by higher pretax income, as we talked about. We did have, certainly on a cash basis, slightly higher deductions, $1.9 million, driving the overall $6 million increase in taxes, resulting in a effective tax rate in 2017, 10.6% versus 1.6% in the first quarter of '16. That 10.6% is still within our 7% to 11% range on a GAAP basis. And after some adjustments, it's certainly well within that range.

Speaking of non-GAAP adjustments on Page 13. At the bottom of the page, you'll see our diluted earnings per share moving from that page left to right. We have one adjustment for the quarter, and that's adding back -- excuse me, reducing our diluted EPS based upon favorable weather, $0.04, so going from $1.17 to $1.13. That compares to $1.04 in 2016. And adjustments going from the $0.82 to get to the $1.04, we added back $0.09 last year for unfavorable weather and we added back $0.13 for the disallowance -- MPSC disallowance we discussed again, getting to $1.04. So at $1.13, a $0.09 improvement on a non-GAAP year-over-year basis or 8.7% improvement.

As you can see, nice thing that we break this out through the P&L, after adjustments, still a nice increase in gross margin. Operating expenses, though, up at 5.9%, again, driven a lot by property taxes there. Operating income, 1.2% increase thanks to the interest expense improvement. We see pretax up about 3.8%. And lastly, after adjusting the income tax items for some of the items we mentioned from adjustment perspective, we had a $1.9 million increase in taxes. And net income was up 8.1% after on a non-GAAP year-over-year basis.

So kind of taking you through the P&L on a non-GAAP basis. With that, turning to Page 14. On the far left, you can see the top of the page through the first 3 months, $1.13 adjusted non-GAAP versus the bottom of that page, far left, 2016 adjusted non-GAAP, $1.04, as we discussed on the previous page. When you consider at the top middle column for the second quarter through the fourth quarter 2017, in order to achieve our $3.30 to $3.50 earnings guidance, we have to achieve $2.13 to $2.33 for the second, third and fourth quarters combined.

So you can see at the bottom of Q2 to Q4 of 2016, we achieved $2.26. That amount is comfortably in that band of $2.13 to $2.33. Just to kind of give you an idea of what we need to accomplish for the remainder of the year in order to achieve our guidance.

With that, turning to Page 15. In our 2017 earnings guidance, we are affirming our $3.30 to $3.50 a share. Again, with the major assumptions of normal weather in our service territories, income tax rate of 7% to 11% and diluted average shares of approximately 48.5 million.

As we mentioned on our last call, the company is still supporting a 7% to 10% total return, but acknowledging that we anticipate being at the near end -- or the near term at the lower end of that range of 7% to 10% in light of recent regulatory headwinds associated with the company.

Moving forward on Page 16. Bob had mentioned, from a credit rating perspective, on March 10, 2017, Moody's downgraded our senior secured and unsecured credit rating and maintained its negative outlook on NWE. We did move down on a secured basis from A1 to A2 and on an unsecured basis from A3 to Baa1. The reasons, the rationale for the downgrade and per their Moody's press release is weak financials that will persist over the next 2 years. Equally concerning to the company, of course, is the continuation of the negative outlook as pointed out in their press release related to a more contentious regulatory relationship in Montana.

With that, I'll turn it over to Bob.

Thank you, Brian. I'll touch on some of the regulatory activity and then some operational highlights. First, going in the way back machine to April of 2014. As you recall, the FERC issued an adverse cost allocation order concerning Dave Gates Generating Station, adverse between retail and wholesale customers. FERC denied our request for rehearing and then required us to make refunds, which, of course, we did in June of last year. We filed a petition for review with the U.S. Circuit Court of Appeals for the District of Columbia. That was in June. We do not expect a decision there until the fourth quarter of 2017, at the earliest.

Next to Colstrip. As you know, in May of 2016, the Montana commission issued an order disallowing recovery of certain costs that had been included in the electric supply tracker, and that was related to a 2013 outage at Colstrip Unit 4. There are related appeals now filed in 2 Montana district courts regarding elements of the disallowance. And we believe we are likely to receive orders from the courts in these matters either by the end of 2017 or in early 2018.

The hydro compliance filing, and you know what an incredible undertaking everything associated with the hydro project was, including, ultimately, a compliance filing essentially after the dust has settled and particularly after we had transferred the Kerr Dam assets to the Confederated Salish and Kootenai Tribes. In that order, the compliance order, we were allowed to -- the amount we were allowed to recover in hydro generation rates was reduced by approximately $1.2 million. And on a going-forward basis, notably, we were required to indicate our intentions whether or not to file a Montana electric rate case with a 2016 test year. And that indication is due concurrently with our annual report.

So April 26, we filed our required annual report with the commission regarding 2016 results. And that indicates that we earned less than our authorized rate of return. At the same time, we've also submitted a letter filing with the commission responsive to the hydro compliance order. And therein, we indicate that we do not expect to file an electric rate case in 2017. However, we do expect to file a general electric rate case in 2018 based on a 2017 test year. Of course, the commission may indicate that it might require an additional filing that would facilitate their assessment of just and reasonable rates. In our letter, we explained in great detail what we believe are the necessary steps in advance of a 2018 filing based on a 2017 test year. So we think this is a responsible action in response to the commission's expressions of interest.

In the 2016 schedule 2017 -- Schedule 27, that is our annual report. Concerning ROE, the numbers, a 9.76% actual ROE and a 9.38% normalized ROE, and that as it compares to a 10.05% weighted average authorized ROE.

You're all interested in the status of the Montana natural gas rate filing. As you know, on April 7, we filed rebuttal testimony, slightly modifying our request to approximately 9 point -- to a $9.4 million increase to revenue based upon a 7.33% rate of return and a 40 -- a $431.9 million rate base. The hearing on the first phase of the case, our revenue requirement phase, starts a week from this coming Tuesday. The case is bifurcated with the rate design coming up in the second phase. And we will make our initial filing at the end of May and then a procedural schedule will be set on the legislative front, we had a good session in South Dakota.

Montana, we actually also had a good session on a number of key matters. Late in the session, Montana House Bill 193 was passed, and this bill revises the current tracker-related legislation, which instructed that the Montana commission use an electric cost recovery mechanism that provides for full cost recovery of prudently incurred electric supply costs. HB 193 increases the commission's discretion in regard to how costs are included and dealt with in trackers. And the text of the bill does not address the specifics of the change in cost recovery. The testimony provided by commissioners in support of the bill indicates that requests would be handled similarly to how they are now handled for Montana-Dakota Utilities. And the MDU mechanism allows for recovery of 90% of the increases or the decreases in fuel and purchased power costs from an established baseline. Again, however, due to the discretion allowed in HB 193, we cannot guarantee how the commission may apply the statute to our future electric tracker filings. We expect that the bill will go into effect July 1 of this year.

Next, as you know, we are a very substantial property taxpayer in the State of Montana. And under statute, we are allowed to recover 60% of the change in state and local taxes and fees. The Montana commission has initiated a rulemaking concerning these provisions. Both we and Montana-Dakota Utilities have filed comments on the proposed rules. And this certainly could affect whether and how we are able to recover these costs. And we obviously cannot predict whether the commission will adopt the rules as proposed, modified or not.

Then just a word on the natural gas case. Again, we've -- turning to Page 19, we've made substantial investments in our systems since the last transmission and distribution rate case in 2011. Indeed, about a 16.5% increase in rate base in transmission, distribution and storage. And that's over $50 million. In addition, we have been recovering and earning a return on gas production assets. And this case would bring those assets into rate base as well. As I mentioned, the hearing is set to begin in just a little over a week. The other 2 key parties, of course, the Montana Consumer Counsel and the Montana Large Customer Group.

At the bottom of the page, we highlight what the impact of this change would be on our customers. And again, most importantly, we've been investing very responsibly in the safety and adequacy of our natural gas transmission and distribution system in Montana. As we've been making those investments and as market prices have come down for the commodity, we have consistently maintained rates significantly lower than the national average and driven those rates down. In fact, even with the rate increase we are currently requesting, rates would be substantially below national averages, but just as notably, substantially below what they were in Montana just several years ago. So we think this is a responsible request and certainly it's important as we continue to invest in these essential assets.

Turning to our capital spending forecast. And you will see that we have moderated the request or the forecast in terms of trying to level out our investments over the 5-year period. There's a somewhat of a reduction in the capital. This is primarily delayed or reduced spending on what continue to be necessary generation assets in both South Dakota and Montana. And then as I mentioned, we do expect to continue to be able to levelize the annual spending, including spending on generation assets. And based on what is currently in our plan, what we know we will be doing, we should be able to fund -- to fund these investments with a combination of cash flows, aided by net operating losses, which we expect we'll have available through 2021 as well as with long-term debt. And as always, if other opportunities arise beyond these projections, new equity funding could be necessary. And in addition to the year-to-year balance, I think it's significant that our investments are balanced among the different parts of the business as well.

With that, I will thank you for your interest and support over the quarter. And the phone is now open for any questions you may have for Brian.

(Operator Instructions) And we'll go first to Mike Weinstein with Crédit Suisse.

So I wanted to ask a question about the filing, the annual report filing. If -- I see that the ROEs that you are talking about, the 9.76% and the 9.38%, that, that's based on the last rate case authorized cap structure, which is 48%. Currently, I guess in this presentation, you're showing a 46% equity ratio as of March. Is that where you expect to be when you file for a 2017 test year?

Brian?

Yes, that's a good question, Mike. I can't say explicitly where we would be. It kind of depends on continued capital spend into the remainder of this year, and I haven't calculated where that -- what that number would be at the end of '17. But we have been trying to keep our capital structure relatively static.

Okay. And on a separate issue, maybe you could talk a little bit more about what do you think is going to happen with the -- specifically, the power cost legislation that's out there. Is that signed by the Governor at this point? Is there a chance that he won't sign it? What's the outlook for that look like?

It has not -- as of the first of this week, it had not been transmitted or obviously been signed. We are assuming that it will become law. And so we'll sign accordingly.

Will that law present some opportunities for you to earn additional amount of the 10% that you can earn on?

It's really too early to answer that. And we'll be paying attention to how the commission decides to implement and obviously, working with them.

And just heading into the next -- into this next rate case, maybe you could talk a little bit more about electric distribution infrastructure upgrades, the program for that as well as the gas distribution, future upgrades for that and the programs that you have under trackers.

Yes. Just starting with the electric and gas distribution side. As you know, we are now in the final stages of what has been a very successful distribution system infrastructure project. And we've tackled an awful lot of basics in the system and done a lot to really make the system ready for progressive deployment of technology as that makes sense. At the same time, over the last year, we have been refining plans, actually using some interesting scenario-planning approaches for transmission and distribution and all the sub-elements, doing that both in Montana and South Dakota. And the -- and we've been working actually in both states with very engaged stakeholder groups to really discuss scenarios that, for example, in one case, would maximize low cost, in some cases, by using technology to push some more traditional investments further out. Another scenario that would maximize reliability, also being aware of cost. And then a scenario that would really focus on grid modernization in the sense of pushing an awful lot of technology out closer to the grid edge and setting the foundation for a fairly robust technology platform. There are some similarities, but -- many similarities, of course, between our South Dakota and Montana operations, but there are a few differences as well. So for example, in South Dakota, there's relatively more automation already in the distribution system. And we do plan to move to an AMI deployment in South Dakota, really focusing at this point in 2018. We're not quite there in Montana because there is still value in the existing AMR system. But what we're seeing is substantial investment, but with a prudent investment in natural gas transmission as well as distribution on the transmission side, driven by some real capacity needs in both the distribution and transmission driven by some significant upcoming compliance needs. On the electric side, again, kind of a soup-to-nuts approach to a whole range of identified needs. What I'd say we're doing that some other companies aren't is really an awful lot of engagement with our customers, large and small, about how they believe our network should continue to evolve to best meet their needs. Just a word about the South Dakota, call it network South Dakota, really engage through -- met for an entire year, essentially, gave us good feedback on our deployment. The commission staff who participated in that group kind of summed things up that you're a good company. You provide good service. Your rates are fair. Stay focused on that. And I think we would take that as good advice.

And we'll go next to Brian Russo with Ladenburg Thalmann.

Just in the upcoming Montana electric rate case, obviously, ROE will be a focus just like any other rate case. But the -- some of your generation assets, like Colstrip 4 and DGGS and Spion Kop, those ROEs were set outside of the general rate case process. Are those ROEs up for review and potential adjustment as well? Or just the base, rate base outside of those generation assets?

We expect this would be a consolidated filing.

Okay. So those ROEs would be up for review as well?

The asterisk there is that as a commitment to the Montana commission at the time that Colstrip 4 was put in rate base, we made a commitment to a fixed ROE for the life of the plant. And at the time that was made as a concession because we had very limited authority under the agreement we had entered into to actually sell the plant, had limited authority to diverge from that agreement. We believe it was a valuable asset for our customers. So at that time, 2009, we made a specific ROE commitment there. I think that we're some time out from a rate filing, and we have a lot of work to be done between now and then. Just if you haven't had a chance to look at the letter that we filed, Pat Corcoran, our Vice President for Government and Regulatory Affairs, described in detail what the Montana filing would require, what the parallel FERC filing would require and then listed some pretty significant lists that really need to be done as inputs into a filing. Obviously, the cost allocation study, the resource allocation study, including the Dave Gates Generating Station, a study of renewable integration and load variability, an important study concerning net energy metering cost and benefits. This is actually pursuant to what we thought was very positive legislation just passed in Montana. A potential for an electric decoupling study to support any filing there. And then we continue to be engaged in a whole range of possible scenarios concerning a future energy imbalanced market. And depending on what direction that leads, there will be a related cost and cost recovery as well. So we tried in our filing, we tried to be quite specific in the work that we need to do. And much of this is work we need to do, I think, very cooperatively with the commission staff and with other parties.

Okay. Great. And will the unallocated FERC portion of the DGGS, will that be included in retail rate base? Or do you want to see how it plays out in the courts first?

I think we'd want to see how it plays out. The important thing about Dave Gates is that as a result of the hydro acquisition, coupled with the study work that's reflected and summarized in the last Montana electric plan, Dave Gates is now providing a whole series of services that it simply wasn't even available to provide previously.

Okay. Got it. And then what's the NOL position as of March '17?

Actual amount, I'll have to look that up, Brian.

Thanks for lobbing one over to Brian, by the way.

I was relaxing here, Brian, like waiting for your questions all to Bob. And I'm digging that up.

Okay. And then I might as well ask another question. This House Bill 193, I mean, how is it going to be implemented? I mean, I read the bill and it's very vague. Is it really just up to the Montana commission to set the guidelines? And it doesn't have to be 90-10? It could be an actual dollar amount above or below a deadband and possibly asymmetric favoring customers?

Yes, honestly, we don't know. What we know is really primarily the testimony the commission offered in the session and then looking at how MDU is treated.

Hey, Brian, federal NOLs at the end of '16, $365 million. And for Montana NOLs, about $275 million.

Got it. Okay. And then just a clarification on the guidance range. I understand it's an adjusted guidance and you exclude weather. Is the high end or the low end subject to weather and the midpoint is normal weather? Just a little insight into that.

When we put together our budget, it assumes normal weather. And we put together our thoughts in terms around guidance, it assumes normal weather. So I can't give you a gauge where that number is in the range, but based upon where we sit after the first quarter, we feel very comfortable with our guidance.

Right. So in theory, you can get to the higher end of your guidance, exclude -- with normal weather?

I'd argue, Brian, that, that's true, but there are a lot of other moving parts in the P&L, of course.

And we'll go next to Chris Ellinghaus with Williams Capital.

What was the usage look like in the first quarter?

Usage in terms of volumes?

Yes.

Yes, look, I'll just put it this way, customer growth, I'll start there, primarily just focused on residential customers, up 1.3% on electric side and 1.2% in the gas side. But on a volumetric, we saw very good loads in both electric and gas, residential, kind of megawatt hours were up 12.3%. For residential, total retail as a whole, 7%. Dekatherms from the gas side of the business, 16.1% and a total of nearly 16% for total retail as a whole. And just even use per customer and again, weather impacts this as well, use per customer is up as a whole 10.9% in the residential side on electric and 14.7% on gas.

Okay. Other than the power supply cost bill, is there anything else remaining floating around the legislature?

They should be on their way home. I think things are pretty well sorted out at this point.

Okay. And as far as -- you're shorter than probably anybody in the country, but the commission doesn't seem to feel that's super imperative. What's sort of your thinking on the time line for addressing generation needs at this point?

Well, first of all, I think it's important for you to be aware that after the commission issued its comments on the plan, John Hines, our Supply Vice President, and his team went in and spent, say, half a day with the commission and staff answering questions about the plan. And that was very constructive. We have issued an RFP with the help of a third party to manage that process to begin to take down the first piece of our need to address what is a, obviously, a pretty significant need. And the commission has an important oversight role there. Separately, I know they will be doing some work to understand the relationship between our needs and the experience in the rest of the region. But your starting point is correct. We have -- we are unique among Western companies in having a negative reserve margin. So we are pretty bare naked.

And we'll take a follow-up question from Mike Weinstein with Crédit Suisse.

Brian, I was just wondering, what is the average interest rate that you're paying now on debt at the company versus the interest rate that was approved in the last rate case as you head into this next rate filing?

I think in terms of what we -- I mean, are you saying, what we could achieve today? Or are you saying, what it's in the most recent rate case?

I guess what I'm wondering right now is, how much are you actually paying in interest right now versus what is being recovered in rates versus -- from the last rate case?

Hang on a second. Take a look at that, Michael.

Yes, I am looking at the thing right now. It says 5.78% is the -- 5.78% is the average cost in the 2016 filing on the 2016 annual report. What was the authorized in 2011?

I'm looking that up. I have an overall rate of return. I don't necessarily have the interest cost.

We can get back to you on that, too.

Yes.

I'm trying to just get a handle on what other metrics might be affecting -- might be changing as we come out of this next rate case.

Yes, Michael, and I'll be happy to follow up with you on that one and make sure you get what you need on that.

We'll take our next question from Jonathan Reeder with Wells Fargo.

Bob, you indicated that Montana electric is showing a 9.76% actual, 9.38% normalized for 2016. What's the number that the regulators care about the most? Is it the normalized that accounts for the various commission ratemaking adjustments?

That should be the case, yes.

Okay. So like when your rates are set, they're designed to allow you to earn the ROE on a normalized basis?

Right. The outliers are adjusted out, not unlike the way we report GAAP and non-GAAP, really.

And matter of fact, when we actually have to do a rate filing, we have to normalize kind of our test year for weather and those types of things that are similar in methodology.

Okay. And then could you just walk us through like what would be the timing of filings if, one, the PSC requires the additional filings then, two, if they call Montana electric in for a rate case based on the 2016 test year? How would that work from a timing perspective?

To do a full-blown rate case and do it properly, I think, honestly, we've laid out about the best schedule one could. Again, the commission has indicated it can inquire further about our annual report that the Schedule 27, and we understand that. But in terms of actually doing a rate case, I think we work truly very hard to make a detailed filing and road map for getting to the rate case that they want. From a customer perspective, I think it's notable that we will be able to stay out of an electric rate case for an additional year. Most people would say that's good news. In any test year, a key date is that the test year data essentially becomes stale on September 30. So typically, we look for a filing right about then in the third quarter.

Okay. So in order to, I guess, do a 2016 filing, you would think that you would need to at least have it made by the end of the third quarter?

Yes.

Okay. And then, I don't know if you could just kind of elaborate a little more, like what are the range of impacts if the MPSC establishes minimum filing requirements for the property tax trackers? Like how does that necessarily, I guess, impact the recovery of that 60%?

It's -- that is just probably an invitation to get in trouble, speculating until we actually see what the final rules look like.

But would you anticipate having any modification of that current 60%? Or it's just kind of the, I guess, the method to which you can actually implement the tracker change?

The 60% figure is specified in law and the -- I think the commission's focus in the proposed rules has been documentation and really ensuring that they're applying the 60% appropriately. But they are very concerned with documentation. And I will say, the commission and we are very much united in our concern about the impact that centrally assessed property taxes have on our customers. And the commission has worked hard to address that. They require us to disclose property taxes, specifically on customer bills. And then for our part, we completely recognize how important the taxes are that we pay to local services in particular, but we're extremely concerned by the dependence of Montana on centrally assessed utility taxes, which means on us. So again, one of the highlights of the Montana legislative session for us was there is a bill passed to study the centrally assessed taxation system. We think that's very important. We'll be putting a lot of work into that over the next 2 years.

Yes, Bob, if I could, Michael asked a question earlier in terms of debt. I think to answer your question, Michael -- I apologize, Jonathan, as opposed to your question, this is certainly dealing with Michael's earlier question. All electric last time was at a 5.3% interest rate in the gas filing we did. And for Montana debt, which was all Montana debt, is 4.67%, if that gives you any help. Now again, on a 2017 test year, can't guarantee that, that would still be 4.67%. Hopefully, Michael...

(Operator Instructions) And we'll take a follow-up now from Chris Ellinghaus with Williams Capital.

I remembered the question that I wanted to ask you. The compliance element of the tracker legislation, typically, a lot of commissions want to see sort of annual compliance or ROE filings to allow trackers, but you already have an annual report so it seems to meet that standard. Are they just looking for more details on property taxes themselves to add to, say, the annual report filing?

No. They're looking -- it's specifically a request to see much greater detail around tax filing information, what the tax is assessed against. I'm not sure that, that's helpful.

Okay. And the other thing that's a little bit confusing is the commission sort of, I guess it was in their press release, which I think was at the beginning of the year, where they sort of attacked the MDU property tax tracker. But that seems to be the direction, at least as far as the technical structure is of what they prefer in a tracker. I'm not sure really what the question is here, but seems odd that they sort of picked out MDU as their preferred path considering that they were so vehemently against it at the beginning of the year. What's

(technical difficulty)

(technical difficulty)

that the current system is set up. And ultimately, our -- both our shareholders and our customers pay a disproportionate share of the Montana property tax, so we fully agree with that.

Sure. Is there any effort underway in Montana to -- I mean, I don't remember what the number is, but I think your property taxes were up something like 12% in the quarter. Is there any effort underway in Montana to try to address who's bearing the burden of property taxes in the state?

And that really does get to the underlying structural question. And there's been a substantial amount of reform in the overall Montana property tax system. And to some extent, the -- there are certain categories of centrally assessed property that have not been addressed. And again, that's why we're very pleased that the legislature did initiate the study. I think that's extremely important. And just as a percent of bill, our Montana electric and gas customers pay much more in centrally assessed taxes than is the case for customers in Nebraska or South Dakota. There are lots of people in positions where they have some responsibility for carrying out the structure as it's currently set up, who will recognize the burden and who have some real frustrations as well. So ideally, certainly, a goal would be to work over the next 2 years to identify some solutions and get those in place. In the meantime, as we do every year, we have to work with the Department of Revenue to manage that impact as much as possible.

It appears there are no further questions at this time. Mr. Bob Rowe, I'd like to turn the conference back to you for any additional or closing remarks.

Just as always, thanks for your interest. You know where to find Mr. Meyer, and I know we'll be seeing many of you over the coming months. Take care.

Thanks, Tracy.

This does conclude today's conference. We thank you for your participation. You may now disconnect.