NorthWestern Energy Group Inc (NWE) 2021 Q2 法說會逐字稿

Good afternoon, and thank you for joining NorthWestern Corporation's Financial Results Webcast for the Second Quarter of 2021. My name is Travis Meyer. I'm the Director of Corporate Finance and Investor Relations Officer for NorthWestern. Joining us today to walk through the results and to provide an overall update are Bob Rowe, our Chief Executive Officer; Brian Bird, President and Chief Operating Officer; Crystal Lail, Vice President and Chief Financial Officer.

We also have other members of the management team on the line with us to address questions as appropriate. (Operator Instructions)

NorthWestern's results have been released and the release is available on our website at northwesternenergy.com. We also released our 10-Q pre-market this morning. Please note that the Company's press release, this presentation, comments by presenters and responses to your questions may contain forward-looking statements. As such, I will direct you to our disclosures contained in our SEC filings and the safe harbor provisions included on the second slide of this presentation. Please also note, this presentation includes non-GAAP financial measures. Please see the non-GAAP disclosures, definitions and reconciliations also included in this presentation today. The webcast is being recorded. The archived replay of today's webcast will be available for 1 year beginning at 6:00 p.m. Eastern today and can be found on our website at northwesternenergy.com under the Our Company, Investor Relations, Presentations and Webcast link.

With that, I'll hand the presentation over to NorthWestern's CEO, Bob Rowe?

Thank you, Travis. I've just finished a very good Board meeting. This was our first Board meeting together in 1.5 years, also the first meeting chaired by our new Board Chair, Dana Dykhouse, CEO of First PREMIER Bank. We've gotten a lot of work done in the system so far this year. I'm sure we'll come back and talk about some of that.

Yesterday, we hit a new peak in our Montana balancing authority of over 1,909 megawatts. The balancing authority, of course, includes load in addition to our retail load. But what was significant was that that required over 1,000 megawatts of import. So that was a hot day in July where our system was heavily dependent on imports. We've seen the same pattern in February with very cold temperatures, so it's just a reminder of the importance of our infrastructure, but also, again, our critical exposure to the regional capacity market and the importance of our plans to address that. End of sermon.

Net income for the second quarter increased $15.7 million as compared to the same period last year. Diluted EPS increased $0.29 as compared to the same period last year. After adjusting for weather differences and a non-cash liability, non-GAAP adjusted earnings per share increased $0.14 as compared to the same period last year. The Board declared a quarterly dividend of $0.62 per share payable on September 30 to shareholders of record as of September 15.

In April, we entered into an equity distribution agreement having an aggregate gross sales price of up to $200 million. During the 3 months ending June 30, we issued 879,309 shares of common stock at an average price of $64.91 for net proceeds of $56.3 million. In June, after 2.5 years of very hard work, we joined the Western Energy Imbalance Market. And this real-time, within-hour energy market will provide our Montana customers with economically efficient energy to resolve imbalances and variations in load and generation. So it's a tremendous lift made even more challenging by COVID. And we heard from CAISO, the market administrator that it was one of the smoothest entries that they have seen. And again, a lot of credit to our leadership and the people doing the work, and we look forward to realizing those benefits for our customers going forward.

With that, I'll turn it over to Crystal Lail.

Thank you, Bob. And as Bob mentioned, it is rather nice to sit in a room with my colleagues again and do meetings in person and begin to feel like we're resuming back to normal in some regards. With that, I'll take you to Slide 4 with the P&L.

As Bob mentioned, net income of $37.2 million as compared with $21.5 million last year in Q2 were a $15.7 million increase or 73%. Really, a solid quarter in line with our expectations on a GAAP basis and driven by really improved gross margin offset by a bit of higher operating costs. With regard to gross margin on Slide 5, gross margin of $230.3 million as compared with $208.3 million in the prior period, an increase of $22 million or 10.6%. When you look at the amount of that gross margin change, it falls to the bottom line that's approximately $20.2 million, and I'll touch on multiple pieces of that here.

First, with regard to the transmission piece of that. There's really two parts in that $9.1 million increase. That includes the release of a deferral of interim rates on our transmission rates related to the ultimate resolution through a compliance filing with the MPSC. I'll remind you all that our wholesale rates ultimately become a credit in our Montana rate retail side. So that was the ultimate resolution of that release here in the second quarter, and certainly contains some prior period amounts to that. The remainder of that increase of electric transmission is really driven by conditions in the market in the second quarter here with both a combination of higher loads and rates with warm and dry weather, both the South and West of us.

The second piece here is the electric QF liability adjustment. This is something we typically adjust every year in Q2 and can be a bit noisy. I'll speak to this in a couple of parts too as we did pull a piece out of this as a non-GAAP adjustment. The pieces that you're typically used to hearing about. One, we adjust for output and pricing, that was a little bit favorable this year. The offset to that is there is a contract in which there's price escalation on an annual basis, that was unfavorable. The net-net of those two pieces is approximately $2.6 million of unfavorable impact, which offset the non-GAAP portion that we pulled out of $8.7 million, which was a revision to an estimate based on clarification of contract terms. And as we don't expect that to recur, that's reflected as a non-GAAP item. And as usual, there's a page in the exhibit that will give you more information on that and a clearer breakout than I probably just covered verbally for you. But again, $6.1 million on a GAAP basis contribution to margin for the quarter.

The next piece I'll speak on is electric retail volumes. We did experience overall warmer spring weather and certainly, a piece of that is driven by customer growth of the overall $5.6 million. With that, our residential usage and impact was about flat and commercial was an improvement over prior year. As we think about second quarter of last year, certainly, the lowest usage and most COVID impact that we saw, comparatively, so certainly a rebound from that. And as we think about the ultimate trends there and the trends on a use per customer basis, we continue to see what would be higher residential loads than normal, but not quite as high as they were in Q2 of 2020. We also continue to see lower commercial and industrial usage. But again, those are better than last year. So a bit of a move in the trend but the trend continues to be there a bit of a shift in use per customer. And I'll speak to that a little bit more as we get into guidance for the rest of the year later.

With that, I will turn to weather on Slide 6. Weather, you'll see that April and May were a little bit cooler made up for with warmer weather in June. I will highlight a couple of things. One, second quarter is always a bit of a shoulder quarter for us. Secondly, you'll see some pretty big percentages on the cooling degree days of 153% warmer and 66% warmer. The thing I would point you to is that's a relatively small amount of ultimate cooling degree days there. So the ultimate impact of that, and mostly again June was a favorable weather impact of $2 million as we think about it compared to normal and $1.5 million as compared to the same period in Q2 of 2020. And again, I'll address that a little bit more when we talk our GAAP to non-GAAP adjustment.

Slide 7 gets into operating expenses. Operating, general and administrative expenses were $77.1 million in the quarter as compared with $71.7 million in the prior period or an increase of $5.4 million or 7.5%. With that, again, the amount that falls to the bottom line is approximately $3.2 million of that variance. There's a couple of things driving that. One, an increase of about $2 million related to generating -- generation maintenance at our electric facilities. In addition, about $1 million related to employee benefits. That's primarily driven by an increase in medical costs. And then also a $0.9 million increase related to implementation of technology and the associated maintenance costs with that as well.

The thing I would note of those increases, a bit of an offset, is our uncollectible accounts. We're certainly seeing ultimate collections from our customers come back in that regard, and that offset those increases by approximately $2.8 million. The other thing that I would note here is that we do expect headwinds in the back half of the year driving toward a more sustainable and normal amount of costs on an ongoing basis. From a property tax perspective, we're about flat to the prior year, an $0.3 million increase. And then depreciation, a $2 million increase driven primarily on plant additions.

With that, Slide 8. Operating income of $59.1 million as compared with $44.8 million in the prior year period or $14.3 million, a 31.9% increase driven primarily at the gross margin line. Interest expense and other income are immediately below that. Those both show a favorable net adjustment. There was a decrease in interest expense and increase in other income. Both of those are driven by the debt and equity portions of AFUDC for a favorable impact on those quarter-over-quarter. From an income tax perspective, I would highlight that we have income tax expense in the current period as compared to a benefit in the prior year or prior period. That's driven primarily by higher pre-tax income partially offset by higher flow through deductions.

From a cash flow basis, you'll see on Slide 9. Our cash flows for the 6 months ended 2021 compared to 2020, you'll see a decrease of $114.7 million. Most of that decrease occurred in Q1, and we talked about that then, but I'll reiterate a couple of things. An $82.8 million increase in market purchases of supply. Again, most of that was experienced in Q1 though we do continue to see higher overall market prices of electricity out there, but most of that was a Q1 impact. And then in addition, as we've talked about, we had a refund for our first -- our FERC customers of approximately $20.5 million, and that has impacted cash flows as well during the period.

Slide 10. I'll walk you through and just remind you of what we just discussed from a non-GAAP adjustment perspective. One, weather impact, you'll see the $2 million we discussed as compared to normal with a $0.5 million in the prior period. So net-net over the period, $1.5 million. In addition, we talked about our QF liability adjustment and that we pulled out a piece of that that we don't expect to recur, which is a clarification of contract terms of approximately $8.7 million. Favorable adjustment there. With that, reducing GAAP net income to $29.2 million for the quarter or $0.56 as compared with $21.1 million in the prior quarter or $0.42 on a non-GAAP basis.

Slide 11 provides our earnings guidance for the year, and as I've mentioned, the quarter for us was in line with our expectations. One of the things that we had talked about before when we announced '21 earnings guidance is that we had a bit wider range of $0.20, which was $3.40 to $3.60. With the quarter here in our performance, so far halfway through the year, we've narrowed that in a bit to a $0.15 range or $3.43 to $3.58. We've also updated a couple of assumptions that I would mention is key to how we think about the back half of the year, and there's still a lot of the year left to go. But one of the things is we are continuing to see the pattern, as I mentioned earlier, from a usage perspective, of commercial industrial volumes being off from what we would consider normal and residential offsetting that a bit. We do expect that to continue in the back half of the year.

The other thing that I mentioned is again, while we've had a strong first half of the year we do expect operating costs in the back part of the year to increase, and those would reflect a more sustainable level. So we expect those pressures in the back part of the year as well. The other thing I certainly would highlight is that we've updated the diluted shares outstanding of approximately $51.8 million to $52 million. To increase that, it was previously $51.5 million to $51.8 million. The other thing that we've noted is that increased share count update the reflection that we expect to issue the full $200 million of equity that we had indicated a need for previously. That does adjust that timing sooner than we had initially indicated.

The thing I would comment on that is that's in response to certainly the need to support the growth that we are experiencing from the Company's basis and also certainly to support and maintain our credit ratings. I would also remind you that we are on track for the $450 million of CapEx spend in '22. That compares to approximately $400 million in '20 -- Well, I should say, '21, I think I got my year wrong. $450 million in '21, I'm a getting year ahead already, as compared to $400 million in 2020. And in 2020, we did expect to do equity and ended up not doing that. And then that compares to more of a $300 million number from before that. So the thing I would indicate in the sense of the amount of equity we expect to do this year is again in support of our credit ratings, but also the amount of growth we have in front of us as a company.

And with that.

Thank you. I'll point out that that year is the only number you've got wrong since you've been the CFO. So Crystal and Travis and the whole Finance department continue to do just great, great work.

Touching lightly on some of the regulatory matters. We don't expect to file a general rate case in any of our three jurisdictions this year, which is still 2021. But we have made several other important regulatory filings in our Montana jurisdiction. In April, we filed a request to delay implementing our fixed cost recovery mechanism pilot, that's the Montana version of decoupling, for another year until at least July of 2022 due to the continued uncertainties are created by COVID. And on June 29, the Montana Commission did grant that delay. We have not seen a written order. We're, of course, eager to see that. We appreciate the workload at the commission. So that was very much a positive.

Also in April, we filed a request to an increase to the forward costs used in developing rates for the recovery of our electric power costs in Montana, through the Power Cost and Credit Adjustment Mechanism or from the PCCAM. That will be approximately $17 million, and this is really intended to better align the base costs in the PCCAM with the costs that our supply team is facing in the market and incurred on behalf of our customers. On June 29th, the commission did approve implementing interim rates, reflecting the $17 million increase that -- because it is an interim is, of course, subject to refund. There, again, a written order is pending.

In May, we filed a request to approve acquiring electric capacity resources that are critically important to address our customers' exposure at peak to the regional power market. This was based on the 2020 RFP that we've been discussing with you for quite some time. Brian will come back and discuss that in much more detail. And then, we've finally been able to fully wrap up the FERC rate case that was the parallel to follow-on to our last Montana general electric rate case, and we were pleased to have reached a settlement refunds there and have implemented the new rate structure, which we think will be a benefit all around.

So, Crystal is doing a great job in her new role. Meanwhile, Brian has transitioned. He's replaced the consonant with a vowel in his title. I'll set up the capital plan just briefly and then turn it over to Brian to go into some of the details. We always share this slide with you, and we do have a robust capital plan looking out 4 or 5 years into the future. As Crystal mentioned, we are on track to meet our capital plans for this year. It involves over $2 billion of total investment over the 5-year period, financed with a combination of cash flows from operations, first mortgage bonds and equity issuances.

During the second quarter, as you know, we did initiate the $200 million ATM program, and we expect to issue the remainder of that this year, in order to support our current capital program and protect our credit ratings. Capital investment in response to the Montana RFP and the supply resource investments would be incremental to these amounts. And then, of course, finance plans are subject to change, depending on CapEx, regulatory outcomes, internal cash generation and then market conditions.

The South Dakota resource investment is well underway about $100 million, that is included in the 2021 through 2023 period, and we expect that this level of capital should result in annualized rate base growth of 4% to 5%. And again, the projects do not include the investments necessary to support the Laurel Generating Station, if approved by the commission, that should be an additional $250 million, excluding AFUDC spread primarily over 2022 to 2023.

So in his new role as COO, Brian has been spending a lot of time in the field across all 3 states, making the rest of us very jealous and doing a great job working with our executive team and management in the operations area to really enhance the already high level of cooperation there. So, as a result of that, we are poised to continue investing in and delivering our customers the highest possible level of service. So off to you.

Thanks, Bob. As Bob mentioned, on the capital slide, we had a tremendous amount of investment, all areas of the operation extremely busy in terms of this higher level of capital spend. And we anticipate with Laurel coming online, ultimately enable to make that investment to continue these high levels of capital investment.

On Slide 14, speaking to the generation portfolio in Montana, remember back in May, we made our filing associated with -- to acquire electric capacity through resources identified in our January 2020 RFP. And from that, 2 of those entrants, if you will, the Laurel Generation Station and the esVolta energy storage contract we included in that filing, Laurel being 175 megawatt RICE units located in Laurel, Montana, which we intend to invest $250 million and is expected to be in commercial operation in late 2023, early 2024. And then the 50-megawatt battery facility from esVolta to be located near billings and entering that through a 20-year agreement to fill the 5-hour duration tier identified in the RFP. Not included in that filing, but should be included in our PCCAM is the Powerex transaction, a 5-year power purchase agreement for 100 megawatts of capacity in energy projects, originating predominantly from hydro resources.

Earlier this week, the MPSC concluded that the application met the minimum filing requirements, and that starts to shot clock for 270 days, the receipt of an adequate application. So we hope certainly, near the end of this year, we'll have an outcome. And hopefully, we can get going on the project at that point in time.

Moving over to South Dakota. Our project in Huron, The Bob Glanzer Generating Station is going along extremely well, and we expect to have it online by the end of this year. In addition, we plan to move forward with Aberdeen and as a mentioned, the South Dakota capital is already included in our capital plans, but we expect to have the averaging unit also online by the end of 2023, much like of the Laurel Generating Station.

Moving on to Slide 15. We really took the first half of this year to go after those things from an ESG perspective that we haven't had appropriately disclosed. And we worked extremely hard to tie that to the release of a brand-new web page that we expect to have coming online within days. And once that happens, it'll be much, much easier for investors and those folks from an ESG who rate us to actually find information, updated information, the total company effort to capture this information and record it.

And as a result, we're going to be able to provide new reporting. New reporting from a SASB perspective, from a TCFD will have an AGA ESG methane reporting template, all of those are being new. We'll have updated our EEI ESG carbon reporting template, and we're just going to have a plethora of sustainability statistics, updated and expanded, and we're really excited, really for 2 reasons. The web page is going to look great, and you're going to see a very, very large focus on ESG. And from our perspective, it's going to be very easy for the folks that rate us from the ESG perspective to capture that information and from our perspective, better depict our scores on a going-forward basis.

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

Great. Thank you, Crystal. Thank you, Brian. We are ready for questions.

Thanks, Bob. (Operator Instructions)

Be sure to press the icon that has all the fingers pointing up.

Thank you for your reminder, Bob. Okay. We will take our first question from Ryan Greenwald at BofA Securities.

Good afternoon, everyone. Appreciate you taking our questions. So maybe first, how should we think about the puts and takes through the rest of the year here relative to the prior walk that you guys had previously included in the slide deck? You have this additional equity, but can you talk a bit about any other moving pieces here? And what factors might be keeping the midpoint unchanged?

Crystal?

Ryan, I think a couple of things. One, the first half of the year is in line with our expectations for where we expect to be performing. The other thing we updated a bit is, we do expect a bit of headwinds in the back part of the year with continued load trends, as I alluded to, from a customer usage perspective of seeing lower commercial and industrial usage, while admittedly better than the prior year. Still not back to what we would call normal offset in part by improved residential usage, but again, not quite as good as it was last year. So that's certainly a piece of it. The other headwinds I alluded to is on the operating side, and I think we've provided that walk as to where we expect operating expenses to be from a full year basis. And again, 2020 wasn't normal. 2021, we're moving back toward what I think is a more sustainable level of OA&G, and I certainly expect an increase in the back half of the year there. While we don't give quarterly guidance, they're certainly not what I would call a even spread across quarters there.

Got you. And then, was the transmission deferral expect anticipated?

Yes.

And then maybe just lastly on equity. How should we think about this in terms of ongoing from here outside of the additional generation into '22? Does this kind of limit the equity needs in '22?

I would say two things. Obviously, we're investing a lot of CapEx in the business, and we have a good problem to have there in the sense the amount of growth in front of us. The other thing I would say just as you think about '22, we've updated where we expect to be from a '21 basis as we get closer to '22. Obviously, we'll update you on our plans there, but certainly always expect to be mindful of our credit ratings along with the growth in front of us.

Got it. And maybe just one more, if I may. In terms of financing the generation, any initial thoughts in terms of an ATM or equity block or how you're ultimately thinking about that?

You're ahead of us on technical execution there. I think our comment has been, we'll be roughly 50-50. And as we get closer to that, and obviously proceeds with the approval docket, we'll have more to come on that.

We will take our next call from the line of Jonathan Reeder at Wells Fargo.

Can you guys hear me okay?

Sure can.

Great. So maybe just piggyback and off of Brian a little bit regarding the decision to now issue all $200 million in '21, was this decision at all influenced by some of the positive drivers in particular, the transmission strength not the deferral portion but just the strength in general partly driven by the hot weather out West. And maybe the thought that you could opportunistically strengthen your credit metrics a little more now without adversely impacting your ability to hit guidance.

I guess, I -- Jonathan, I would answer your question in a couple of parts. One, the sense of the additional equity as we had talked about coming out of Q1, we're on a negative outlook from Moody's perspective. So we're mindful of where we're going from a credit rating perspective. The other key factor certainly is the amount of CapEx and investment in the system at this point. So those are the bigger pieces of it. And then obviously, from a guidance perspective, I think we've talked to a bit of what we had from -- we -- our performance through the first half of the year in line with our expectations.

Okay. And then regarding that PCCAM base request, do you have what your final base that you're going to be supporting? I know the interim was based on like $156 million, but the plan was to kind of update a final request off of forward power prices as of the end of June, I think. Do you know what that updated number is? Just trying to get a sense.

Yes. I think the final number is $165 million for base.

We will take our next call from the line of Brian Russo at Sidoti.

So just could you elaborate on the dynamics of the transmission margins outside of the interim rate? You mentioned hot and dry weather in the South and West of you, I would imagine that's continued into July, does your guidance capture the transmission revenue potential upside above normal in July?

I guess a couple of things I would say about that is, obviously, the conditions related that drive that. There's long-term firm transmission and it's a short-term market, and that short-term market is more what's driven in day-to-day, that can be different. So certainly, we had -- we've moved into a formula rate environment. So we've captured that in our expectation for the remainder of the year. But the thing I would just highlight at a high-level perspective is we've continued to highlight where we have margin headwinds. There may be puts and takes in there, but from a guidance perspective and being nearing in that range we expect that I guess, the performance through the first half of the year and where we expect to be the back half of the year, obviously, transmission is good news as that continues.

Great. So I mean in essence, third parties are utilizing your transmission to wheel power to the West where demand is needed.

Yes. For South.

And then, Brian, you mentioned earlier that you were hopeful to have a Montana pre-approval decision by the end of the year, but I think the clock is 270 days plus another 90, which would be a total of 1 year, and I'm just curious why the expectations for the end of the year? And why don't you think the commission would take the full amount of time?

In fairness, you're absolutely right if you did the math. I'm focused on 270. The extra 90 days, of course, puts us a full year, and I was an eternal optimist, Brian. There's always an opportunity that could be done by the end of the year but you're right. If you actually do the shop clock from 270, you're going to be around the end of the first quarter.

Got it. And then on the a second RFP that you alluded to in the press release during 2022, I would imagine you want to wait for this pre-approval process to be over. But in terms of the size or components of the next RFP, would it be similar to the one that was just concluded?

I think the best thing to say at this point in time what's -- like you said, you're absolutely right. Let's get Laurel approved and move forward, and I think we'll assess at that point in time our needs and we'll size accordingly.

Okay. Great. And then just lastly, on the balance sheet, you have the 50% to 55% debt-to-cap, and even with the equity issuance and the solid first half of 2021 the debt-to-cap is still at 53% or so. I mean are you targeting just the midpoint through the end of the year and going forward or are you targeting the lower end or the higher end?

I think I'll stick to my 50% to 55% range in that regard, Brian, but also just say that obviously, we're focused on the FFO metrics that we would need to be at from a credit ratings perspective.

Okay. We will take our next call from the line of Andrew Levi at HITE Hedge Capital.

Can you hear me?

Sure can. Can you hear us? Andy?

Can you hear me?

Yes. We can, Andy.

Yes, my phone starting glitching. Okay. Good presentation. A couple of questions. So the first one is just on load, specifically commercial and I guess to a lesser degree, industrial, but again we've only had a couple of samples this quarter and something has reportedly gone on the earlier side. But we've seen quite a recovery in commercial loads in other parts of the country. So could you kind of just talk about that and why -- again, I understand that you said they have recovered, but the Cs going slower than others because some are at like pre-pandemic levels? And how much incremental load would it take to get it to like the indirect levels on the commercial and the industrial side?

Yes. I think the thing I would just highlight there, Andy, is a couple of things. One, we did see improvement in commercial loads certainly as you look at -- compared to the prior period, but not back to what we would term normal. So I think if you look at the detail we have in either the appendix of the investor deck or in our materials, you would see that we're continuing to trend under what would be -- if you think back to 2019 level, what would be a more normal amount of commercial loads there. So certainly, some improvement. And I guess I will give a little -- it's hard to say I won't give commentary, but I don't think it -- obviously, the prior year was shut down related.

This year I think if I had to weigh in, it's more workforce issue related and other factors in the economy. So different drivers. But again, we're seeing some improvement there, but not back to what we would call normal. On the residential side, so again, you have heard for probably many utilities, but we continue to see strong residential usage but not as strong as prior year. So the thing that I think is indicative of that is that you kind of see flat residential revenues even though we had a warmer quarter in certain ways. So I would think about it that way, and we're continuing to monitor. As I mentioned from a guidance perspective, with the back half of the year there's still quite a bit of uncertainty there as where those trends will go.

The color I would add to that is just the three economies we serve are among the very strongest in the country. And just as Crystal said, we don't know everything that's going on. But very clearly, one of the challenges is a severe workforce constraint. I know that's occurring in other parts of the country too. We have a number of communities we serve where the employment rate is actually slightly -- unemployment rate rather is actually slightly negative. So that is a constraint on businesses getting back to full operation. Yes.

But we certainly saw improved commercial usage, right? And so while it's not back to what we would call normal, it's considerably better than it was last year.

So if you kind of had to net it all out longer term, so if you got back to a more commercial and to some of the industrial side sense to a more like pre-pandemic load and residential probably is going to always be a little bit stronger than what it was pre-pandemic. Would that mean kind of like a mutual earnings outlook as relative to that or would there be looking at the base upside that you got back to a more normal situation?

I guess I would answer it this way is we will see where -- and I hate the term, the new normal but we will see where the new normal is. But ultimately, the other thing I would remind you of is we have solid customer growth in our service territory. And just from a customer count perspective are seeing good indicators there, solid economies. So all those things are certainly something I would look to as favorable here.

Okay. So then kind of transitioning to like the customer growth and also what you mentioned in your press release, I guess you're saying by -- I forget, I think it's 2025 maybe it's a bit longer the 700-plus megawatts needed incremental capacity and I'm assuming the $250 million of CapEx that project, that's adjusting some of the 700 value from that description. On top of that, that leaves 500-plus of megawatts metered. What type of customer growth are you assuming in that, and I guess, is there upside to about 700 million -- 700-megawatt shortage? And at the same time, if you kind of had the perfect world, if you got to kind of address what's best for the customer, what's best for your balance sheet and what you can do, how many megawatts are you able to grid all of them? Not saying that that's what you want to do but how many megawatts do you think you could reasonably do yourself if you were to fulfill that deficit?

Yes. Andy, I'll take that. I think I'm just going to go back to what I said earlier. From -- on a longer-term basis, we continue to address our capacity needs. And there's still a lot of moving parts that we see in Montana and around us from a resource perspective. And so we'll give more clarity around that in our upcoming RFP and then ultimately in our RFP that follows.

Okay. That's fair. And when will that RFP -- I'm sorry, I missed it but when will that be final?

RFP is in -- sometime in 2022. As Brian mentioned earlier. The expectation that you based on an outcome on Laurel that's probably at the earliest end would be mid-2022.

Right. Okay. Got it. And then my last question is just around the equity ATM versus -- I mean, there's not a lot of equity that you need to do. I mean I guess a lot relative to how many tiers you have outstanding, but as far as people like us putting up capital, it's really not a lot of profit, a lot of it is kind of dedicated too. So the ATM, you did about $56 million in the second quarter. I guess it could kind of be -- to have the same in the third and fourth quarter and ultimately get that $300 million spend. But why not come to us? It's not cheap, and it's kind of get it done. Even if it's at the end of the year that's kind of dribbling it out. And I've asked this question before. I'm under the brief in the specialties because there are a lot less hedge fund running around. There's plenty of loan-only money that I have. But the volumes are much lower than they traditionally have been. So I think it affects your equity a little bit more during the ATM. So again, has anything changed in that thought pattern? And obviously, I've asked you this question, so.

Crystal will give you the CFO answer. What I will say is it sounds like you are very enthusiastic about supporting Northwestern Energy stock, and we appreciate that very much.

Well, Bob's got it there. I would say the key piece here is we wanted to set your expectations for the amount of equity as for the rest of the year. With regard to the technical execution, we'll worry about that as we close out the year.

Okay. We will take our next call from Matt Davis at Coann Capital.

Can you hear me?

Yes. Sure can.

Yes.

Okay. Thanks. Sorry about that. Just a quick question. Maybe I'm missing something, but I just wanted to go back to the load commentary before with the improvement that you're seeing in margin. When I look at Slide 21, it looks like the volumes, megawatt hours were actually down period-on-period for the electric segment, can you just reconcile that if I'm missing something, and how that circles with your commentary on the $5.6 million of upside year-on-year?

Getting to that page, so give me just a second here. So I think from a commentary perspective, you'll see that residential is roughly flat, right? So that's a key piece of it there. The other piece that I would say is that commercial you see certainly an improvement from the prior period, and then the offsetting headwind there is the industrial loads are off a little bit. And again, the key piece there between the megawatt hours and what you would see in our revenues is also a piece of what falls to the bottom line. And so the -- trend-wise, I think we're highlighting the right pieces for you. But from a margin perspective, the ultimate impact there, there's certainly retail volume improvement between those.

We will take our next question from the line that ends in 0231. (Operator Instructions)

Hello?

Yes.

Can you guys hear me?

We can now. Yes.

This is Sophie Karp of KeyBanc. I was just wondering on transmission, there's lot of conversations happening in the West right now about transmission planning especially in -- as it related California load but others as well. Is there -- as you think about your IoT next year or even beyond that, is there room for you to maybe add transmission into that thinking process?

What I would say, and then I'll hand it off to Brian, is we are and have always been very deeply involved in all of the Western discussions around transmission. Most of those are relatively informal because this is not an organized market. Many of the most structured discussions around transmission come in the context of regional resource adequacy work being led by the Northwest Power Pool. And as we look at how we're going to meet our Montana retail customers' needs, we're very aware of the constraints on our transmission system in terms of being able to import power, which is why it's one of the reasons it's so important to have generation within our balancing authority.

More generally, we've had a pretty active transmission investment program now for the last -- certainly for the last decade within our service territory, and that's transmission to serve our customers. Beyond that, as transmission projects rise or fall in the West, that is certainly something that we want to stay close to and consistently have. Brad?

Yes, Bob, I think you said spot on. All I would add is we're very concerned about both electric and gas transmission constraints. And obviously, there's an opportunity for us to invest in increasing transmission on gas or electric, we're more than happy to do that to actually access ourselves to markets and outside of Montana. And we would gladly do that. In the meantime, we're also going to be focusing on what we can do within Montana from both electric and gas perspective to make sure we have supply and able to meet our needs within Montana, and I think that's an opportunity now to protect our customers to deliver to them on a daily basis every day particularly during peaks, but also for us for a great opportunity for investment as well.

And it looks like Jonathan Reeder from Wells Fargo has a follow-up question.

I just figured I'd ask the obligatory inflation question what you guys are seeing on that front, any pressures and your ability to combat them?

I'll take my first crack at it, and then I know Brian will have something to add and maybe Bob too. But I think from a couple of regards. One, as you think about our CapEx plan here in 2021 year I think I'm in a lot of those costs are already baked in. Where I would expect you would consider inflation is more in the out years of '22, '23, if the trends continue. Whether they're a short-term trend or a long-term trend, time will tell but if so, then certainly, your cost per to do the same work, we would certainly expect that to ultimately impact us and the customer build.

And all I'd add is that inflation is certainly a concern going forward. Obviously, we'd have to increase operating costs potentially and obviously, capital investment. I'd also tell you that we're running in to supply -- some supply chain issues. We've done a really nice job of managing that thus far. We're having great success this year, and we wanted to actually expand our implementation of AMI and Montana was going so well, but due to supply chain concerns there we're going to have to kind of keep to our original schedule. So otherwise, things are going pretty well but we are keeping our eyes out for concerns around inflation, concerns around supply chain.

Got you. And then the other one just kind of wildfire activity, I know there's been some in Montana. Anything that we should be aware of that's kind of impacting your all over concern and maybe just remind us how I guess any incremental costs associated with either wildfire mitigation or I guess biding them or whatever how that recovery process works?

What I would say is we've been very active planning for wildfires and other events for a number of years. We participate in a lot of good regional analysis but have developed our own strategy in terms of -- it includes everything from hazard tree clearance, those are danger trees outside the right-of-way down to a really sophisticated analytical program to identify the line segments that need particular investment. Because of the nature of the program that's a capital item, not an expense item.

We could talk to you about it for 2 hours. In fact, we did just a couple of weeks ago, I have a great 2-hour meeting with the Montana Commission giving them a good presentation of what our fire team within asset management is doing. We also spent good time at the Board of Directors' meeting talking about the program. The Montana Commission did give us support specifically for hazard trees in the last general rate case, and I think we're seeing the benefits of all that work during this very dry year. There's always more that we can do just in maintenance of the system, but the foresight of our distribution and transmission folks is really paying off. Brad?

Yes. I'd just add I mean, Bob, mentioned earlier today that we had a peak load as of yesterday and obviously, there are fires in Montana. You're reading about them in the paper. They impact our system we manage around and we continue to provide that service with very little interruption to our customers, and it just speaks to the quality of our operations at this company. I think the other thing I'd say is we get reminded -- I get reminded at least by the T&D folks at this company, we've been dealing with forest fires through the -- over 100 years we've been in operation.

With that, it looks like our queue is exhausted. Before I hand it back to Bob, though, I would invite everybody over to the pool party at Andy's house. It sounds like they're having fun over there. Bob, with that?

You left me speechless, which is really hard to do but it's a great visual image. I wish we were all at Andy's pool. So enjoy the rest of your summer. Very much looking forward to seeing you in person over the rest of the year. Take care, everybody.

Thank you.