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NorthWestern Corp (NYSE:NWE)
Q2 2019 Earnings Call
Jul 24, 2019, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Northwestern Corporation's Second Quarter 2019 Financial Results Conference Call and Webcast. At this time, I would like to turn the conference over to Northwestern's Investor Relations Officer, Travis Meyer. Please go ahead, sir.

Travis Meyer -- Director-Investor Relations and Corporate Finance

Thank you, Christina. Good afternoon and thank you for joining in Northwestern Corporation's financial results conference call and webcast for the quarter ending June 30th, 2019. 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. On the call today with us are Bob Rowe, President and Chief Executive Officer; Brian Bird, Chief Financial Officer and other members of the management team in the room with us to address questions if needed.

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 contains words such as expects, anticipates, intends, plans, believes, seeks, or will. This information is presented in this presentation is based upon our current expectations. 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 upon reasonable assumptions, actual results may differ materially. These 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 presentations, we will open the phone lines to allow those who are dialed into the teleconference to ask questions. The archived replay of today's webcast will be available for one 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 it over to our CEO, Bob Rowe.

Robert C. Rowe -- President and Chief Executive Officer

Thank you very much, and thank you all for joining us. Today we're speaking with you from Bozeman, Montana. And Bozeman is one of the most the -- Bozeman area, including Bozeman Big Sky, and over down toward Yellowstone Park, and the Paradise Valley, one of the most rapidly growing areas anywhere.

Two nights ago, we had a tremendous community event, our Board members and community leaders, lots of discussion about the partnership and growth in this area and responsible approaches to growth. And truly is a great partnership.

Also, lots of appreciation for our employees who volunteer activities in Bozeman, which is true across the Company. In fact, on Friday and coming back over to help with a trial bill. Tomorrow, a number of our Board members are going down into Yellowstone Park to meet with our crews who serve that area and whenever I'm meeting with those folks, I remind them that the 5 million people who go through Yellowstone every year couldn't have the experience if it weren't for the service that our employees provide.

Turning to second quarter highlights, our net income for the quarter increased $3.9 million, 8.9% as compared to the same period last year, and this increase was mainly due to an income tax benefit in 2019 and a reduction in revenue in '18 due to impacts of the Tax Cuts and Jobs Act for customer refund. And these improvements were largely offset by lower gross margin due to the adjustment of a Qualifying Facility liability and also a mild spring weather, along with planned higher operating expenses.

Our Diluted EPS increased $0.07 or 8% as compared to the same period in 2018. In May, we reached a settlement with all parties who filed comprehensive revenue requirement, cost allocation and rate design testimony in our Montana electric rate review. If the Montana Public Service Commission approves this settlement, it will result in an annual increase to electric revenue of approximately $6.5 million and that's based upon a 9.65% ROE and rate base and capital structure as we filed, as well as an annual increase -- decrease in depreciation expense of approximately $9 million.

The Board of Directors declared a quarterly dividend of $0.575 per share payable September 30th to shareholders of record as of September 13th. And with that, off to Brian.

Brian B. Bird -- Chief Financial Officer

Thanks, Bob. I have to note that the second quarter, though, it's a shoulder quarter, or definitely our smallest quarter during the year, it did have a lot of moving parts. My first point out on this page is so the summary financial results for the second quarter. Our gross margin was down $14.6 million or 6.4% primarily as a result of a lower QF benefit on a year-over-year basis.

Our operating expenses were up in total $5.8 million or 3.6%. The OG&A higher pension, higher hazard trees, things that we've forecasted to be higher in '19 versus '18 plus we had scheduled maintenance, that being offset to a degree by the lower depreciation Bob mentioned earlier.

Those things netted to lower operating income on a year-over-year basis, and pre-tax income. Finally, we did have a much lower income taxes, $25.3 million lower income taxes, primarily as a result of the release of unrecorded tax benefit resulting in total net income increase of $3.9 million or 8.9%.

Now moving on to more detail on gross margin. Total gross margin was $215 million, $14.6 million in the prior year period or as I mentioned earlier, down 6.4% nearly all of that decline was in the electric segment, decrease in gross margin is due to the following factors. Really three drivers, the primary drivers, if you will, the QF liability adjustment again, a smaller QF liability adjustment benefit in 2019 versus 2018.

That's partially offset by the Tax Cuts and Jobs Act impact if you think of it this way, there were no revenue to grow [Phonetic] associated with TCJA in 2019 versus 2018's deferral. And the other offset, the Montana Electric Supply Cost Recovery and think of that primarily as the result of the elimination of the debt band within the PCCAM.

And so recording that benefit for the quarter. That, and some other items led to change in gross margin of approximately $14 million. We do have some other items that impact gross margin, but are offset within net income as a whole, totaling 600,000 for a total decrease of $14.6 million for the quarter.

Moving on to weather, as Bob mentioned earlier, we did have a mild Q2. You do, it's the quarter where you have both heating degree and cooling degree days. To point out from a heating degree day, we had very little heating load during the quarter and for all intents and purposes, particularly since Montana has -- doesn't have the same air conditioning load as you expect in a lot of states. We have really had effectively had no cooling load whatsoever.

And as a result, again, second quarter is shoulder and it's always our lowest loads for the year. So some weather, we did estimate unfavorable weather in Q2 2019 resulted in a $300,000 pre-tax detriment, and that as compared to normal, and then a $1.1 million pre-tax benefit as compared to Q2 2018. So I think of 2019 as a little less worse weather than the 2018.

Moving on to operating expenses. Operating expenses were $166.1 million, $5.8 million or 3.6% higher than the prior year period. In the operating general administrative expenses, they were up $7 million or 9.5% -- I'll discuss that a little bit more below.

Property taxes were up slightly, primarily due to additional additions to P&E[Phonetic]. And depreciation and depletion were down $2.5 million as a result primarily of the adjustment consistent with the proposed settlement in our Montana electric case.

A little more detail on the OG&A expenses. We did have a $3 million of the $11.2 million of change in OG&A that impact net income, $3 million of that was generation maintenance expense. All of that was all planned maintenance, that did, that occurred in 2019, that didn't occur in 2018. Thus the increase on a year-over-year basis.

As we discussed, we're certainly spending more on hazard trees and we're spending more on employee benefits, primarily pension in that regard. And just to remind folks, we've made it clear from a training perspective that we do expect to have $4 million more of pension expense in 2019 versus '18 on a full year basis and $4 million to $6 million more hazard tree expense in 2019 versus 2018.

Those items I mentioned, maintenance -- generation maintenance expense hazard trees, employee benefits are primary drivers of that $11.2 million. We do also have items that change OG&A, but they're offset elsewhere within the P&L, leaving us to the net impact of a $7 million increase in OG&A.

Moving on to operating income, I mentioned that's down, it's down $20.4 million or 29.5%, below that interest expense, up slightly primarily due to higher borrowings. Other income there's some moving parts there, obviously we mentioned the slight change due to the deferred comp and pension, offsetting OG&A and those items were partly offset by AFUDC during the quarter.

And that gets us to the pre-tax income down $21.4 million or 45.6% for the quarter. Below that though, given the income tax benefit, the $25.3 million and again, that's primarily driven by the $23.2 million of unrecognized tax benefits recorded during the quarter.

And I'll talk about tax reconciliation on the next page. And regarding that, you see the $25.3 million benefit at the bottom of that page on a year-over-year basis. The primary drivers, of course, we talked about the unrecognized tax benefit, $23.2 million, but we also did have lower pre-tax at -- near the top of the page, $4.5 million benefit there.

Those are partly offset by lower flow through in production tax credits for the quarter. I would acknowledge that those items are relatively close on a year-over-year -- on a year-to-date basis. Last thing, I'd just say about income taxes, you may have seen in our 10-Q that we are expecting a negative 7% to negative 12% ETR on a GAAP basis for the year and we also reiterate the 0% to 5% ETR on a non-GAAP basis for the year.

Moving forward to the balance sheet, a little change in the balance sheet on a year-to-date basis, the PP&E is up approximately $100 million and I think of that being offset, liabilities and equity about $50 million increase to debt and $50 million increase to shareholder's equity. At the bottom of the page, we did have a slight reduction in our debt to cap on a year to date basis.

Moving on to the cash flow statement, we did see a significant decrease, if you will, of cash provided by operating activities. On a year-over-year basis, almost all driven by changes in working capital. We do a good job to the right to identify what those big drivers are.

But again, approximately 80% of that change in the $100 million of reduction in working capital, $80 million of that is $39 million is really a swing from an over collection position in 2018 to an under collection position in 2019. We also had to refund the customers approximately $20 million, associated with TCJA that -- I think was in the beginning of 2019, so on a six months year to date basis.

And then lastly, we have been providing folks that interconnect to our system that make deposits as they -- those two has come in line, we refund those deposits that was approximately $19 million on a year to date basis.

So there was a significant change there. We did also have a higher PP&E additions during the quarter and those items were funded by certainly issuance of debt higher than we had on a prior year basis. Moving forward to adjusted non-GAAP earnings, very quickly, what were the items in -- for the quarter of 2019, we had a slightly unfavorable weather.

We talked about that effectively $0.01 associated with unfavorable weather. But we did remove $0.45 associated with the unrecognized tax benefit and so moving from $0.94 to $0.50. That comparative to a prior year period where we had an unfavorable weather and the QF gain where it went from $0.87 to $0.63.

So comparatively, $0.50 down and from $0.63 in the non-GAAP basis from prior year. One thing I'd point out primarily for the quarter though, results on a non-GAAP basis are down on a year-to-date basis for a year-over-year basis, excuse me, we are actually quite pleased with our results on a year-to-date basis. Those are relatively flat on a year-over-year basis.

We do anticipate certainly on year end to manage results, provide a total share of return expectations that we've communicated to The Street. I'd also say we've had good progress certainly on a PCCAM release and great legislative outcome there. We've had good progress on the rate case.

We've been addressing hazard trees and a pension expense and expenses we certainly needed to go after. And I feel really good about the quarter as a whole and certainly where we sit year to date as a whole. And with that, I give it back to Bob.

Robert C. Rowe -- President and Chief Executive Officer

Thanks, Brian. Just following up on the point where Brian left off, to give you a preview of some of the things we're working, that I know you'll have questions after that.

Regulatory front, of course, the last two months have been all about the Montana electric rate review, where we did reach a settlement with the major interveners and settlement involved an increase to revenues of $6.5 million, based upon a 9.65% return on equity, coupled with a decrease of depreciation expense of $9 million.

And we expect a final order from the commission during the fourth quarter. In May, we submitted a filing with the Federal Energy Regulatory Commission for our Montana transmission assets. In June, the FERC issued an order accepting the filing and also granting interim rates effective July 1, and of course, subject to refund.

The new Southwest settlement procedures, as well as terminating our related Tax Cuts and Job Act filing as you know referred to as a robust settlement process, settlement judge has been appointed, and we expect the first settlement conference to take place in early August. As Brian mentioned, on the legislature front, we actually had a very successful legislative session in all of our states, but particularly in Montana and there our real focus was trying to bring the legislative electric supply tracker back in line with what the legislature had really intended in 2017.

And in fact, the legislature did revise the cost recovery statute to prohibit deadband and to require 100% recovery of qualifying facility purchases, as well as a 90% customer, 10% shareholder, overall sharing of costs above or below an established baseline.

We continue to invest in our transmission and distribution infrastructure. I mentioned the growth we're seeing particularly in our Bozeman division. That is certainly a part of it, but more generally on both the gas and electric side, we're investing to ensure safety, capacity and reliability.

In addition, on the natural gas side, pipeline investments are driven by safety compliance requirements. We take those very seriously. And then finally, grid modernization and resilience and that includes an advanced distribution management system and advanced metering infrastructure.

And on the advanced metering, we have a deployment under way here in South Dakota and Nebraska, essentially moving from north to south, and based on that, we will in the coming years shift to a deployment in Montana.

Very, very big undertaking, jointly between our electric supply and electric transmission team is moving into the Western Energy Imbalance market and you see the map of the Western participants on page 13 of the deck. Challenge for us as we've discussed over the months are, we sit on the far eastern edge of the Western Interconnect and we needed to make decisions that were appropriate for our customers and for our system.

But we do see significant benefits to our customers from moving into the western market. And then, of course, ongoing cost control efforts, monitoring cost, including labor benefits, property tax, and as Brian mentioned, we made several important commitments over the last few months that we think are appropriate over the long term pension and building on our already very robust efforts to deal with vegetation management.

Turning then to energy supply resources and other critical responsibility. Our South Dakota electric supply plan is well into implementation. The plan was published last fall, focusing on modernization of the fleet to improve reliability, flexibility and to maintain compliance with our obligation in the Southwest Power Pool and Montana and South Dakota are not electrically interconnected. Over the last several years we moved into SPP and regularly [Phonetic] seeing benefits there.

But in significant part, our South Dakota plan is focused on meeting the compliance requirements in SPP, but also being able to get the real benefit out of full participation. So the plan identifies 90 megawatts of existing generation that should be retired and replaced over the coming decade.

On April 15th, we issued a request for proposals for 60 megawatts of flexible capacity to serve South Dakota and the online by the end of 2021, responses are due actually by the end of this week and using a third party we'll be evaluating proposals with outcomes determined by the end of the year.

Montana Electric Supply Plan, a draft was released in March. We will be finalizing that in the third quarter. It's an extensive, comprehensive document and awful lot of inputs and a very good analysis went into that. The plan supports the goal of developing resources that will address the changing energy landscape in the West, the Pacific Northwest and specifically in Montana and that landscape is changing rapidly.

We have plenty of energy, we are severely challenged in terms of meeting capacity needs and that's true throughout the Northwest driven in significant part by plant retirements. It's doubly or triply true in Montana, because we have still a negative 27-or-so percent capacity margin. We're the only -- we continue to be the only electric company in the west with a negative margin.

And in part, that's a result of continued legacy from deregulation and divestiture in the late 1990s made a lot of progress in really communicating the exposure that our customers face during peak times in the summer, during peak times in the winter. And the analysis that our supply department has undertaken emphasizes that the risk is a price risk and we see that when we are in the market on behalf of our customers during periods of peak. But increasingly, with plant retirements and growth in peak demand, it is a reliability risk as well.

So currently 630 megawatts short at peak, we're in the market to procure that. But even with strong assumptions around growth and efficiency and alternate delivery models, we -- our conservative estimate is that we could be 725 megawatts short really in just very few years, 2025. So we expect to file the plan in the coming weeks.

We will continue to communicate with our customers and decision makers about the approach and the plan, the identified need and the risk, and then we will move to the first of several, all-source proposals late in this year seeking peak capacity to be available by the end of 2022.

And I emphasize again that it will be for any resource, any kind of resource to meet our customer's needs. And we expect, just as we did in South Dakota, we would use an independent third party to conduct the RFP. As a result of the fact that there will be an RFP, in [Indecipherable] South Dakota. We haven't included this associated capital investment in the five year forecast.

But obviously these additions could increase our capital spending over that five year horizon. And turning to the capital forecast, we anticipate $1.6 billion total capital over the five years continued to be funded with a combination of cash flows supported by NOLs that will be available now through 2020, as well as long term debt issuances, as we say, every quarter, it seems, significant capital, not included in the above projections could -- or further negative regulatory actions either one could necessitate additional equity issuance.

The point of the five year capital forecast is to continue to meet the needs of our customers for a safe, reliable service, adequate capacity to meet their needs today and in the future.

And as always, you see, over time, the identified capital projects really are appropriately distributed by jurisdictions and by function as well. With that, we will open it up to your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. And we'll take our first question from Michael Weinstein with Credit Suisse.

Michael Weinstein -- Credit Suisse -- Analyst

Hi guys.

Robert C. Rowe -- President and Chief Executive Officer

Hey, Mike.

Michael Weinstein -- Credit Suisse -- Analyst

Sorry, if you've covered this before. Maybe I missed it, but on Colstrip Unit 3 and 4, I understand your negotiations with Westmoreland over coal pricing, and I'm just wondering what the status of that is like? When do you think you'll have something like [Phonetic] down be able to say that, that plant is going to be operating?

Brian B. Bird -- Chief Financial Officer

I'd say we're in a good position here in terms of reaching a final coal contract that's based on, I think, constructive discussions with the other owners and also a very constructive approach that the new management had -- Westmoreland is pursuing. So we feel actually quite good about being able to announce a coal contract in the near future.

Michael Weinstein -- Credit Suisse -- Analyst

Got it. And also on the unrealized tax benefits this quarter. Are there any other situations that are similar to that, that are awaiting statute of limitations to expire going forward?

Robert C. Rowe -- President and Chief Executive Officer

Well, you've noted we just started [Phonetic] $35 million notice [Phonetic], but there's no timetable associated with that. If in fact there's a timetable, you usually talk about that a year in advance of anything like that and you'll -- as you see the language, we don't have any language associated with anything in the near future.

Michael Weinstein -- Credit Suisse -- Analyst

Got you. Okay, thank you very much.

Robert C. Rowe -- President and Chief Executive Officer

Thanks, Mike.

Operator

And we'll take our next question from Julien Dumoulin-Smith with Bank of America.

Robert C. Rowe -- President and Chief Executive Officer

Hey, Julien.

Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst

Hey, thanks. This is actually Ryan Greenwald on for Julien.

Robert C. Rowe -- President and Chief Executive Officer

Hey, Ryan.

Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst

How's it going?

Robert C. Rowe -- President and Chief Executive Officer

Good.

Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst

Thanks for taking our question. So as you guys progressed with the plans in South Dakota and Montana, I know you're still saying at least $200 million in opportunities. But are you able to provide a little more color on the cadence around potential investments?

Robert C. Rowe -- President and Chief Executive Officer

No, not really. And they are -- the RFP, as we've discussed administered by a third party. The focus is on meeting the identified needs. And I really don't think we can say anything more than that at this certainly, go though [Phonetic] we will be able to share more detail over the coming months.

Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst

Fair enough. But would you be eligible to own the whole amount potentially?

Robert C. Rowe -- President and Chief Executive Officer

I would say we will have the opportunity to participate in the RFP and we expect that we'll putting forward very solid proposals.

Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst

Got it. And I guess said a little differently with respect with regards to Montana, you said that the 725 megawatts is conservative. How high could that potentially go?

Robert C. Rowe -- President and Chief Executive Officer

Well, I just -- I just don't want to speculate on that. We've got such a big hole to climb out of. I think that needs to be the focus. And the point I was making was that we were making assumptions about continued success with things like energy efficiency programs.

Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst

Got it. And then just lastly, in terms of the Montana supply plan, it anticipates Colstrip remains supply source, right?

Robert C. Rowe -- President and Chief Executive Officer

Correct.

Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst

What's the contingency plan if a new supply contract can't be reached?

Robert C. Rowe -- President and Chief Executive Officer

A new coal contract?

Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst

Yes.

Robert C. Rowe -- President and Chief Executive Officer

At this point, we're feeling better and better, as I mentioned that we will reach a good outcome on the coal contract.

Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst

Got it. And if I could just ask one more. With regards to the tax rate, you guys are saying 0% to 5% and then gradually increasing to 10% to 11% in 2023. Is that still kind of the current trajectory or is that changed?

Brian B. Bird -- Chief Financial Officer

Yeah. By 2023, as you said -- that's what you said, correct? By around 10% by that time period. Yes.

Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks a lot, guys.

Operator

We will take our next question from Chris Ellinghaus with Williams Capital.

Christopher Ronald Ellinghaus -- The Williams Capital Group, L.P. -- Analyst

Hey, guys. Good afternoon.

Michael Weinstein -- Credit Suisse -- Analyst

Hey Chris.

Christopher Ronald Ellinghaus -- The Williams Capital Group, L.P. -- Analyst

Brian, I believe you said that you decreased depreciation and amortization by $4.5 million. I assume that is inclusive of your sort of pro rata portion for the first quarter as well.

Brian B. Bird -- Chief Financial Officer

It is. It is from a year to date basis where we said from a depreciation perspective.

Christopher Ronald Ellinghaus -- The Williams Capital Group, L.P. -- Analyst

Okay. As far as the supply cost recovery for the quarter, that's not all entirely from the second quarter, that includes some prior period recovery, I assume.

Brian B. Bird -- Chief Financial Officer

Are you speaking to the deadband recovery itself?

Christopher Ronald Ellinghaus -- The Williams Capital Group, L.P. -- Analyst

I think -- hang on, let me see if I can find the numbers $4 million, $4.5 million or something like that, $4.6 million.

Brian B. Bird -- Chief Financial Officer

Yeah. At least we look at when we reported obviously, the deadband impact was in 2018 we looked at the deadband as from a tracker period from 7/1 of '19 to 6/30 of '18 to 6/30 of '19 and so from our perspective, last year we had no adjustments associated with PCCAM on a non-GAAP basis and this year we have no adjustments to from our PCCAM on a non-GAAP basis.

Christopher Ronald Ellinghaus -- The Williams Capital Group, L.P. -- Analyst

Okay, great. Bob, as far as the RFP goes for Montana, I assume you don't want to talk about what the capacity number is, but can you give us any kind of sense of what proportion of that 630 megawatts is that equates to your $200 million of capex potential?

Robert C. Rowe -- President and Chief Executive Officer

Well, I would be uncomfortable going in there, if I understand what you're -- what you're asking.

Christopher Ronald Ellinghaus -- The Williams Capital Group, L.P. -- Analyst

Yeah, basically trying to figure out how much that leads to. And then the $200 million is just the five year horizon and sort of if I recall the draft supply plan, there's a good piece that comes out right after that five year horizon, if I'm not mistaken. Is that right?

Brian B. Bird -- Chief Financial Officer

Yeah, the $200 million, is associated with the five year and just -- I just want to make sure we're not talking past each other. The $200 million we talked is both in Montana and South Dakota just to be clear.

Christopher Ronald Ellinghaus -- The Williams Capital Group, L.P. -- Analyst

Yeah. But you gave us the 60 megawatts for South Dakota. So, you know, to get back into the rest. But I think the supply draft, there was another piece coming in 2025, if I remember correctly? A bigger piece?

Brian B. Bird -- Chief Financial Officer

You're saying from Montana's perspective or South Dakota's?

Christopher Ronald Ellinghaus -- The Williams Capital Group, L.P. -- Analyst

Montana.

Brian B. Bird -- Chief Financial Officer

Yeah, I think you're going to see in both places we're going to have a significant amount of investment in Montana certainly by 2025, and that full 90 megawatts that we talk about it in South Dakota should be around [Phonetic] there shortly thereafter.

Christopher Ronald Ellinghaus -- The Williams Capital Group, L.P. -- Analyst

If it wasn't for your capacity needs and just the changing dynamics in the region, would you have any -- I don't know what's the right way to say it is, you don't have any reason why additional renewables aren't in your draft plan other than the current specific capacity needs.

You would be interested in additional renewables when you've set your capacity equivalency requirements in the future?

Brian B. Bird -- Chief Financial Officer

The plan doesn't identify any particular resource. And to me the word renewable is a little bit slippery. As you know in Montana, existing hydro isn't a renewable. So I think rather than a label, I would focus on the attributes of a resource. And you could include environmental attributes. As you know, in the Montana plan, we have various carbon-related scenarios, too.

But obviously in terms of the conventional renewables, solar and wind, there's a lot on or poised to come on our system through the QF process. And then more broadly in terms of our portfolio in Montana right now, we're 70% carbon free and a lot of the resources we have in the Montana portfolio, online in Montana provide little or no benefit to help us meet our peak, the hydro system obviously does.

Christopher Ronald Ellinghaus -- The Williams Capital Group, L.P. -- Analyst

Okay. Thanks for the details, guys, appreciate it.

Robert C. Rowe -- President and Chief Executive Officer

Thanks Chris.

Operator

And we'll take our next question from Vedula Murti with Avon Capital.

Vedula Murti -- Avon Capital -- Analyst

Good afternoon.

Robert C. Rowe -- President and Chief Executive Officer

Hey Vedula.

Vedula Murti -- Avon Capital -- Analyst

A few things here just to make sure I understand. One, given the difference between the interim rates that was granted and the settlement amount. Are you reserving the difference or you are simply booking only the settlement amount in revenues as you're in a fashion, like you're recognizing depreciation expense, that's right -- that's reflected in the settlement?

Robert C. Rowe -- President and Chief Executive Officer

We're -- our counting estimate is at the $6.5 million, not the interim rates. The $6.5 million stipulated with the parties associated to rate case. So we're working to that level, not the interim rates.

Vedula Murti -- Avon Capital -- Analyst

Okay. So then -- so while there will be a true up on cash basis, on a financial statement basis, you're already reflecting the lower settlement amount?

Robert C. Rowe -- President and Chief Executive Officer

Correct.

Vedula Murti -- Avon Capital -- Analyst

Okay. When you talk about the sources and uses of cash for capex, you say specifically about the aided by NOLs available in 2020. What happens when -- can you remind me the amount of NOLs that are available right now in '19 and '20 as part of sources that will not be available on a go forward basis then?

Robert C. Rowe -- President and Chief Executive Officer

We'll get you that number in a second, Vedula. But we do plan to aid through our NOL at that point in time as noted, and we continue to try to manage our taxes as best we can to minimize our taxes. But I'll get you that number in a moment.

Vedula Murti -- Avon Capital -- Analyst

Okay. Let's say -- you talked about the legislative session and the successes there. Especially with the QF recovery and, the 9010 [Phonetic] on power costs. If we look forward in the second half of this year, if you're recovering full out QF recovery. Is there a benefit or is there a benefit that you'll see over the second half? Because you didn't recover last year when we see variances?

Robert C. Rowe -- President and Chief Executive Officer

Could you repeat that? First of all, the answer to NOL question is $257 million that's left. But could you repeat that last question?

Vedula Murti -- Avon Capital -- Analyst

The last question was, now that you're able to fully recover QF incurred costs. If we look forward to 3Q and 4Q, if you're recovering a 100%, is there a benefit to you for -- and comparisons? Because there was an amount perhaps in last year's 3Q and 4Q that you didn't recover, that will aid you in second half?

Brian B. Bird -- Chief Financial Officer

I don't anticipate that would be a material benefit that you could show on a year-over-year basis.

Vedula Murti -- Avon Capital -- Analyst

Okay. And when you said the NOLs were $257 million, I guess what I'm really trying to get a sense of is, if I go forward from, say, 2020 to 2021 in terms of the cash flow effect, in terms of the reduction of cash flow.

Brian B. Bird -- Chief Financial Officer

Yeah, I can't -- I'm not, I can't give you that idea in terms of what that impact would be in 2021 at this point in time.

Vedula Murti -- Avon Capital -- Analyst

The slide implies that basically it goes to zero and then going forward it's zero.

Brian B. Bird -- Chief Financial Officer

Yeah. We still have some PTCs and AMT benefits. But I'm not comfortable giving you exact dollar amount at this point in time.

Vedula Murti -- Avon Capital -- Analyst

Okay. And, I guess in terms of the -- in excess of $200 million over the next five years, that basically -- would that fully just cover the pending South Dakota RFP and the soon to be initiated RFP in Montana? It's just those two those two items.

Brian B. Bird -- Chief Financial Officer

It would be our -- the first two RFPs that you'd see, one from South Dakota and one from Montana.

Vedula Murti -- Avon Capital -- Analyst

Okay. And in terms of that capital, is it reasonable to think that the proportionality of South Dakota relative to Montana is similar to what we see in the capital program, which is generally 10% to 15%? So if we're thinking of in excess of $200 million in there [Phonetic] you're 10% to 15% of that realistically would be considered like South Dakota?

Brian B. Bird -- Chief Financial Officer

I think I would say we've given a pretty much -- pretty good guidance already on the $200 million as it is, I would just tell you obviously on a going forward basis, the opportunity set in Montana is significantly higher than it was in South Dakota.

Robert C. Rowe -- President and Chief Executive Officer

And that is for two reasons, obviously, the Montana jurisdiction is larger, but secondly, the whole round is [Indecipherable] much deeper.

Vedula Murti -- Avon Capital -- Analyst

No, I understand especially that. This is only phase one. I get that. What I'm really trying to make sure of a kind of baseline is the $200 million related to what exactly? I guess in a way to kind of going back to the clarification, I think Chris was requesting in relation to the total shortages versus what this first period would attempt to address?

Brian B. Bird -- Chief Financial Officer

Vedula, I've given you as much guidance as I can on that $200 million.

Vedula Murti -- Avon Capital -- Analyst

Okay. All right. Okay. Thank you very much.

Operator

[Operator Instructions]. And we'll take our next question from Jonathan Reeder with Wells Fargo.

Jonathan Reeder -- Wells Fargo -- Analyst

Hey, how's it going?

Robert C. Rowe -- President and Chief Executive Officer

Good, Jonathan.

Jonathan Reeder -- Wells Fargo -- Analyst

Hey, just one question from me. The Montana supply resource plan. It seems like it keeps kind of slipping when you're actually filing it. Can you kind of outline what's going on? Why it has gotten kind of pushed back and if there's anything we should read into that? You know, whether it's good or bad?

Brian B. Bird -- Chief Financial Officer

Oh, gosh. No, what I would say is we prepared a draft plan. We posted that for a public comment. We received a very robust comment. Our supply folks are analyzing those and the plan is nearly ready to hit the streets. So I don't -- I'm not at all concerned about delay.

What I would say going back to the 2015 plan and, you know, there was a lot of noise at the end of that plan and ultimately we weren't able to implement the RFP that we went out with after that plan. And that's a shame because subsequent events and the real capacity needs that have been exposed both summer and winter just demonstrated how critical it is to move ahead.

And it's a shame from our customer's perspective that we weren't able to move ahead on the RFP following up on the 2015. I really do feel very, very good about where we are with this year's plan.

Jonathan Reeder -- Wells Fargo -- Analyst

Okay. So when you do have a final plan, Bob, I mean, do you feel there will be kind of a consensus throughout much of the state at least what the needs are and how to move forward, like by bringing those party comments and working with your other [Speech Overlap]?

Robert C. Rowe -- President and Chief Executive Officer

Well, what we've done is a plan that really is focused on identifying the need and we have various scenarios that are modeled, I've referred to those before. But ultimately, any project of any kind that is able to help us meet our customer's needs will have the opportunity to bid and be evaluated by a third party. And certainly there will be -- there are strong views about what resources are best able to meet the need.

But at this point, I certainly hope that experience, even over the last two years, should lead thoughtful people to agree on what the need is. And I'll highlight just a couple of things there. Within the Northwest region, there are now multiple studies, including by very reputable, really environmentally oriented firms such as E3 identifying the current and growing capacity needs.

Randy Hardy, former BPA administrator, wrote another paper, just describing how the region has been leading on the investments made, the resources built, going back to the 1950s. That actually includes supply resources, but also truly transmission resources. The Montana commission has spent time now looking at some of those reports. There was a great joint presentation by E3 and our transmission department and our supply department talking about the capacities.

Just last month, Chairman Johnson of the commission wrote an oped that was carried around the Montana newspapers that said Montana needs base load power. And that's a real change in tone and I think a recognition by the commission, certainly recognition by other policymakers around the state that we have a need. Again, there'll be plenty to discuss and debate over how best to meet that need.

But I can't imagine anyone looking at the situation, not recognizing we have a reliability need, reliability risk and a price risk if we don't move ahead to address the capacity needs.

Jonathan Reeder -- Wells Fargo -- Analyst

Thanks for the answer. And then, Bob any more kind of activity around resurrecting kind of Colstrip longer term, you know, with I guess that need for baseload power or is that still kind of, let's get the settlement approved and all that and then maybe go back and revisit it.

Robert C. Rowe -- President and Chief Executive Officer

Colstrip is a valuable resource within a diverse portfolio. The concept that was considered in the legislature, it actually had a lot of support, was a good concept, would have produced an immediate net savings for our customers, would have taken down an increment.

And far, far, far from the majority, but an increment of the exposure we had, would have addressed the transmission risks that we face as well. It really would have used that resource as a bridge to resources that are emerging now, but that are currently, in many cases, not very attractive from a cost performance.

So it's a resource and of course that was compelling when the legislature was in session, and -- it's still compelling now.

Jonathan Reeder -- Wells Fargo -- Analyst

Okay.

Robert C. Rowe -- President and Chief Executive Officer

But the focus right now really is on to the earlier question getting the plan filed and moving ahead.

Jonathan Reeder -- Wells Fargo -- Analyst

Okay, great. Thanks, Bob.

Robert C. Rowe -- President and Chief Executive Officer

Thank you.

Operator

We'll take a follow up question from the Vedula Murti.

Vedula Murti -- Avon Capital -- Analyst

Hi. When you get the plan or when you put out the proposal in late '19 for Montana, how long will the turnaround be before the actual conclusion is reached?

Robert C. Rowe -- President and Chief Executive Officer

Well, let's say that the plan is released and filed in the next month or so. You want to go out for an RFP later this year and move ahead on that. And there's no reason to believe that, that RFP would have to be interrupted the way RFP is coming out of the following plan. We move from there to selection and hope to see a good outcome in terms of resource choice.

Vedula Murti -- Avon Capital -- Analyst

So we'd know the outcome of that, say, mid 2020?

Robert C. Rowe -- President and Chief Executive Officer

That seems reasonable. Of course we don't know what happens between now and then, but that's, I think, a reasonable guess.

Brian B. Bird -- Chief Financial Officer

Yeah. I think the main thing there is the timing associated with when that will make an outcome there. Clear thing as we have to have that capacity in by the end of 2022. So it's important for us to get going.

Robert C. Rowe -- President and Chief Executive Officer

We need resources in order to participate in the imbalance market.

Vedula Murti -- Avon Capital -- Analyst

Okay. And as I recall there -- at least there were times where various policy makers, regulators, etc, have raised questions about the desirability of the utility to own assets as opposed to simply contracting from third parties to meet these needs.

I'm wondering how that type of thought may have evolved and whether you're able to compete equally on an equal comparable footing with any third party as part of this process, such that there's no that type of historical bias -- for lack of a better term, is not relevant?

Robert C. Rowe -- President and Chief Executive Officer

Yes, there are roles for contracted resources and for owned resources and they are complementary. If you take a look at how deep we are in the market at periods of peak and what is happening in that market, it's pretty tough to make the argument that we ought to be more exposed to the market than we already are.

And I think honestly, people who lean too heavily on a market solution to meeting our big needs are not very in touch with recent history in Montana. And as you know, the defining act in that history was deregulation and divestiture of supply, leaving us exposed to the market.

The responsibility we have to our customers is to plan long term, least cost, least risk and the least cost actually really is what we organize around.

Vedula Murti -- Avon Capital -- Analyst

In this RFP, whatever the physical capacity is that ends up being determined. To your point in terms of relying on the market, if it's new physical resources that actually are added to the system, is there an advantage or an imperative that you own it as opposed to a third party building it and basically contract a new contractor firm?

Robert C. Rowe -- President and Chief Executive Officer

Third parties will be on an equal footing with any proposal we make. And the third party administrator to the process will ensure that.

Vedula Murti -- Avon Capital -- Analyst

All right. Thank you.

Robert C. Rowe -- President and Chief Executive Officer

Thank you.

Operator

It appears there are no further questions at this time.

Robert C. Rowe -- President and Chief Executive Officer

Great. Well, thank you very much for the very good discussion and your interest and support. I will be seeing many of you over the coming months.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Travis Meyer -- Director-Investor Relations and Corporate Finance

Robert C. Rowe -- President and Chief Executive Officer

Brian B. Bird -- Chief Financial Officer

Michael Weinstein -- Credit Suisse -- Analyst

Ryan Greenwald -- Bank of America Merrill Lynch -- Analyst

Christopher Ronald Ellinghaus -- The Williams Capital Group, L.P. -- Analyst

Vedula Murti -- Avon Capital -- Analyst

Jonathan Reeder -- Wells Fargo -- Analyst

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