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NorthWestern Corp (NWE -0.72%)
Q3Â 2019 Earnings Call
Oct 30, 2019, 2:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day and welcome to the NorthWestern Corporation's Third Quarter 2019 Financial Results Conference Call and Webcast.
At this time I would like to turn the conference over to NorthWestern's Investor Relation Officer Travis Meyer. Sir please go ahead.
Travis Meyer -- Investor Relations
Thank you Katie. Good afternoon and thank you for joining NorthWestern Corporation's financial results and conference call for the quarter ending September 30 2019. NorthWestern's results have been released and the release is available on our website at northwesternenergy.com. We also released our 10-Q this morning. On the call with us today are Bob Rowe President and Chief Executive Officer; Brian Bird Chief Financial Officer and we also have other members of the management team in the room with us today 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 question 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. 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. The factors that may affect our results are listed in certain of our press releases and disclosed in the company's Form 10-K and 10-Q along with other public filings with the SEC. Following our presentation today we will open the phone lines to allow those dialed in to 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 again that's at northwesternenergy.com under 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
Good afternoon. Thanks very much for joining us today. We are in Brookings South Dakota a great dynamic community that we're privileged to serve. As always when we meet out in the field. We started things off with a community Reception The other night and that was hosted in the meetings facilities at dyke house stadium. And our South Dakota board member Dana dyke house was the champion for developing that great facility. If you're a football fan, you might have seen the game on ESPN game day on Saturday, between the jackrabbits and the bison of North Dakota and we have kind of a friendly rivalry between our North Dakota board member Tony Clark, formerly of the Federal Energy Regulatory Commission, and Dana decals, and of course, Tony and his team won the game. But it was sure a great show for for Brookings, and then this morning we had a good breakfast meeting with our employees here in Brookings and from around from around the area. Turning to third quarter highlights Net income for the quarter decreased $6.5 million or 23% as compared to the same period last year and the decrease was mainly due to higher operating costs lower demand to transmit energy across our system and lower electric retail volumes due to mild weather.
These decreases were partly offset by a reduction in revenue in 2018 due to the impact of the Tax Cuts and Jobs Act higher recovery of our Montana Electric supply costs and an increase in Montana Electric retail rates associated with the pending rate case that being subject to refund. Diluted EPS decreased $0.14 or 25% as compared to the same period last year. Weather-normalized non-GAAP adjusted EPS was $0.50 which is $0.08 or 13.8% lower than this period last year. In June the Federal Energy Regulatory Commission issued an order accepting our filing with FERC for our Montana transmission assets granting interim rates again subject to refund effective July 1 and establishing settlement procedures and then terminating the related Tax Cuts and Jobs Act implementation filing. So the FERC process is also moving ahead through a settlement conference several tactical meetings. And the next tactical meeting will be in Butte this week. Also we announced the results of our South Dakota competitive solicitation process for new generation. We'll come back and talk about that in just a few minutes. And then the Board declared a quarterly dividend of $0.575 per share payable December 31 to shareholders of record as of December 13. And then today the Montana Commission approved the revenue requirement stipulation in the rate case along with a stipulation concerning development of green pricing alternatives and we'll come back and talk about that a little bit more as well.
So with that I'll turn it over to our Chief Financial Officer Brian Bird.
Brian B. Bird -- Chief Financial Officer
Thanks Bob. As Bob pointed out net income was $21.7 million $6.5 million or 23% less than the prior year period. Gross margin was up $2.9 million or 1.4% but that increase was not enough to overcome increases in operating general expenses property taxes interest expense other expense and income tax for the quarter thus resulting in a decline on a year-over-year basis. Getting into more details on these gross margin. Just in fairness it was a disappointing quarter and gross margin certainly points to that. If you take into consideration $2.9 million increase most of -- almost all of that coming from the electric side of the business that 1.4% increase was not enough to cover our costs and again disappointing. In more detail on those increases in gross margin the first 2 there are Tax Cuts and Jobs Act impact in the Montana Electric supply cost recovery really were 2018 detriments to the benefit on a year-over-year basis as a result of not having those items in 2019. Those were pretty much offset by lower transmission revenue through Oasis.
We're seeing fewer people utilize our transmission system primarily as a result of activities at -- lack of activity at the Colstrip plant and some other items that impact gross margin. When you look at things that kind of are our underlying business on the electric side of our business the $1.6 million increase in Montana Electric rates that we recorded for this quarter based upon the stipulation was not enough to cover the shortfall of electric retail volumes. And in fact, on the gas side, the small increase in natural gas retail volumes was not enough to cover the step down that we had in Montana natural gas rates. So those changes all made it up to a very flat margin increase of point $3 million. And so as I said, disappointing from a margin perspective. The other item shown here, property taxes and PTC fees, and other operating expenses flowing through the trackers those netted to an increase of 2.6 million for the total increase in gross margin of 2.9 million. Moving forward to weather on the next page it was a bit of a perfect storm for a very weak weather quarter for us.
Heating degrees are shown at the top. There's very little heating degrees that we received in the third quarter. It's typically a cooling quarter for us. But even in September when we might get some heating degree days it was the only month that we were actually warm in Montana. So we had very little heating degree lowered if you will during the quarter. And again the third quarter being a cooling as you can see by the map down below your 2 months where you'd expect to see most of your cooling July and August we were colder in all our jurisdictions during that time period. So it was a bit of a perfect storm. As you can see we estimate unfavorable weather in Q3 2019 resulting in a $5.7 million pre-tax detriment as compared to normal and a $4.6 million pre-tax detriment as compared to Q3 2018. Then move forward to operating expense on the next page. Operating expenses were $164.3 million or $4.4 million or 0.8% increase on a year-over-year basis. Focusing on those the changes in OG&A actually impact net income. The things we've talked about on previous quarters things that we have made good decisions to invest in during the years putting more money into our pension. We have an underfunded position particularly in Montana and then investing higher dollars in hazard trees are the 2 biggest drivers for this increase in OG&A during the quarter.
We also have higher labor and legal costs and some other costs offset by some generation maintenance -- primarily some timing of some generation maintenance during the quarter. Those things added up to a change in OG&A items impacting net income of $6.2 million. Offsetting those to a degree were $3 million in items that are offset elsewhere within the P&L. Those totaled $3 million for a total increase of $3.2 million in OG&A for the quarter. In addition to that $3.2 million increase we also had a $1.6 million increase in property taxes primarily result of plant additions. And then lastly depreciation depletion actually was down $400000. That's primarily a result of the depreciation adjustment to the rate case stipulation offset partly by plant additions. Moving forward in terms of operating to net income taking all of those matters into consideration you'd have an operating income of $46.4 million which was $1.4 million or 2.9% worse than the prior year period. We did have higher interest expense primarily due to higher borrowings.
We had other expense increase of $2.4 million primarily as the offset to those items shown as elsewhere on the P&L in the gross margin as an offset a $2.4 million increase in other expense there. That -- those things contributed then to income before taxes of $22.2 million or 5.6% or 20.1% worse than the prior year period. And lastly we did have income tax expense increase of $1 million on a year-over-year basis netting to net income of $21.7 million. If we move -- speaking of income taxes as we move to the next page in terms of the reconciliation there. Income taxes as you might expect might be down because of lower pre-tax income both on the federal and state side but we did have a prior year permanent return to accrual adjustment or think of it this way adjustment that reflects the filing of our tax return we had a swing there of $3.6 million and really offsetting a reduction in taxes as a result of lower pre-tax. That change of $3.6 million on a year-to-year basis or $0.07 is a primary driver for an income tax expense increase on a year-over-year basis. Moving forward to the balance sheet.
Not a lot to report here from the balance sheet perspective. It is nice to see shareholders' equity to go over $2 billion at the end of September 30 2019. Also good to see a ratio of debt to total capitalization be on the lower end of our 50% to 55% range. That's very very helpful. Moving forward to the cash flow statement. We have seen as we did report in the last quarter a decline in cash flow on a year-over-year basis through nine months. Cash flow from operations was down $92 million really driven by 4 things. We had credits that we had to give to customers through Tax Cuts and Jobs Act that was resolved in 2018 but the benefits flowed back to customers in 2019. We've had an under collection of supply costs during the year for generation interconnection. We have refunds we had this year compared to deposits in the prior year. And then lastly we had a very small insurance proceeds in 2018. Most of those items were all the first six months of the year. Cash flow as a whole for the quarter was relatively flat.
Nonetheless on a year-to-date basis through nine months down $92 million. That coupled with an increase in investing activity is about $32 million as a result of us to have to issue more debt during the year of it certainly on a year-over-year basis. Moving forward to adjusted non-GAAP earnings. As you know since you have followed us for some time we like to show GAAP on the outer edges of this page and then move with the adjustments toward the center of the page so you can easily compare the non-GAAP numbers from '19 to '18. During the quarter the only 2 adjustments -- well the only adjustment really was unfavorable weather in 2019 and unfavorable weather in 2018. Taking those into consideration those adjustments that actually impacted net income our GAAP EPS in 2019 went from $0.42 to $0.50 and that compared to a non-GAAP number of $0.58 from a prior year perspective and so down $0.08 or 13.8%. As I look at those items and kind of work through the P&L the same could be said on a non-GAAP basis. We did have a decent increase in gross margin 3.6%. But again increases in OG&A property taxes interest expense and income taxes were more than offset as improvements in gross margin.
I would say again though that difference of $0.08 just the tax adjustment alone of $0.07 of really turning up to the tax return could explain away the difference on a year-over-year basis. Moving on to summary financial results on the next page. Gross margin I should give -- from a total amount net income was $142.1 million or up 11.6% or 8.9% on a year-to-date basis. Primary result there is improvement in gross margin $11.4 million. We did have higher operating expenses on a year-to-date basis and higher interest expense and other income but we did have a sizable tax benefit in the second quarter netting in the net improvement $11.6 million on a year-over-year basis through the first nine months of the year. We also should -- on a non-GAAP basis in this case this year and last year of course we had the favorable weather adjustment in this case on a year-to-date basis. And then in 2019 if we remove the tax benefit I spoke about earlier in 2018 remove the QF benefit that we received on a net-net basis we would be year-to-date through 2019 $2.24versus $2.32 a reduction of $0.08 on a year-to-date basis as well. Reason we wanted to share with you the nine months information as well we typically don't do that in the quarter is we are initiating our guidance through -- for 2019.
And I think as a result of the news today in terms of commission or approving the stipulation and the fact that in essence before we could really talk about 2020 at EEI it's very helpful for you to have '19 -- 2019 as a base. We'll -- I'll walk through that very quickly for you here. And to be clear I will speak more to this at EEI in the coming weeks. We start obviously at 2018's non-GAAP adjusted EPS of $3.39. When you take kind of the low end and the high end of those anticipated changes you'd add $0.02 on the low end and $0.12 on the high end and you get to $3.41 to $3.51. However with the share count dilution of $0.03 in either case as a result of a year-over-year basis in terms of equity issuance that took place last year we actually will show an ultimate range for 2019 of $3.38 to $3.48. Clear to say that in our assumptions we always assume normal weather the remainder of the year. And then obviously we'll get a final settlement final order from the commission. But it's good news that the stipulation is approved. We also have an income tax rate range of 0% to 5% and diluted shares outstanding of approximately 50.7% at the end of the year. It's important to point out on this call and -- particularly as we get prepared to talk to you about 2020 at EEI in a couple of weeks to remind investors that we are -- continue to stay focused on our targeted long-term 6% to 9% total return to our investors through a combination of earnings growth and dividend yield.
And again we'll speak more of that at EEI. Certainly as we talk about 2020 we're going to commit to try and achieve those as well. But it's also encouraging and Bob will speak to this more about our ability to add more resources to our capital plan and the good news about our South Dakota resources we'll talk about in a moment. We -- if you think about 2019 how do we achieve that range? If you go to the next page $3.38 to $3.48 in order in the fourth quarter that's going to require us to have $1.14 to $1.24 a midpoint of $1.19. You compare that with $1.07 in the fourth quarter last year it looks like you're a heavy lift. But I'd like to let you know that from our perspective we expect to see expenses to be down a bit in the fourth quarter versus last year. And I think that's going to be a primary driver to help us achieve those numbers. And lastly I'd say again we'll speak to more clarity around all of this at EEI.
And with that I'll pass it over to Bob.
Robert C. Rowe -- President and Chief Executive Officer
Thank you Brian. Well since we're in South Dakota let's start with the South Dakota electricity supply plan. Plan was published fall of 2018 focused on modernization of our fleet to improve reliability and flexibility and particularly to maintain our compliance in the Southwest Power Pool and then lower overall operating cost. The plan identified 90 megawatts of existing generation that needed to be retired and replaced over about 10 years. On April 15 we issued an RFP for 60 megawatts of flexible capacity resources to begin serving our South Dakota customers at the end of 2021. We went through a competitive solicitation process. And we anticipate now being able to construct and own natural gas-fired reciprocating internal combustion engines or RICE units at a brownfield site in Huron South Dakota. It's dependent on selection of the manufacturer's technology but we anticipate about 55 to 60 megawatts of new capacity to be online by late 2021 a total investment of right around $80 million.
And the selected proposal is of course subject to execution of construction contracts and then obtaining the applicable environmental and construction-related permits. So I think it's very very good news for continued great service to our customers in South Dakota and certainly we're excited about the opportunity to refresh our fleet here in South Dakota. Turning to the Montana electricity supply plan that was ultimately submitted to the Montana Commission in August of 2019 they will be holding 2 public meetings one in the afternoon one in the evening on December 9 to receive any further comments on the plan. That plan supports the goal of developing resources to address the really dramatically changing energy landscape in Montana but really around the west and to meet our customers' electricity needs in a reliable and an affordable manner. And the the real vulnerability in Montana and in the west is at peak. So currently we're short 630 megawatts at peak. We procure that in the market and that is an increasingly scarce and expensive product. And we forecast that our energy portfolio was going to be about 725 megawatts short by 2025 again in Montana.
And considering the expiration of contracts and a modest increase in customer demand we think that's an appropriate in fact probably conservative forecast. We plan to solicit competitive all-source proposals later this year for peaking capacity to be available for commercial operation in early 2023. We expect to use an independent evaluator to administer the solicitation and to evaluate proposals and we expect the process will be repeated in subsequent years to provide a resource-adequate energy and capacity portfolio by 2025. And the process will of course specify the need to be met but will be resource-specific both demand side and supply side. And there's a potential capital expand again of course, depending on the outcome of a process of up to 200 million or so over over five years. Other Key matters starting in Montana in May, we reached a settlement in our Montana electric rate case that would result in an annual increase to electric revenue of about six and a half million. That's based on a 9.65 return on equity and the capital structure has filed and also a $9 million decrease in depreciation expense hearings held in May. briefing was completed in late August, in September staff memo recommended approval of the settlement.
And then as you've heard today there was a vote on 2 important components of the overall case particularly a 5-0 vote to approve the revenue requirement stipulation and a 5-0 to approve the green tariff stipulation. Ultimately there are other significant issues for the commission to address in subsequent work sessions and the intention is to issue a final order in the case by December 26. So obviously we're very pleased with that outcome. Legislatively the primary focus has been on implementation of 2019 Montana legislation that revised the electricity cost recovery statute to prohibit a deadband and to require 100% recovery of qualifying facility purchases and a 90% customer 10% shareholder sharing of costs above or below a baseline. So this is a follow-on legislative action to essentially correct Montana Commission implementation of previous legislation. We view this as a relatively straightforward matter should be a straightforward matter and the commission is looking at implementation now. Next we do continue to invest in our transmission and distribution infrastructure really across the company electric and gas.
We're well into a comprehensive infrastructure program focused on safety capacity reliability on the natural gas side investment is particularly driven by safety requirements and then also grid modernization is a primary focus looking at advanced distribution management and advanced metering. In fact as we conclude the metering deployment the AMI deployment in South Dakota and Nebraska we do plan to begin the deployment in Montana next year. We're well under way with plans to join the Western Energy Imbalance Market targeting April of 2021. And based on certainly what we've seen in SPP with a more complete market as well as our analysis of the western market we do believe that can mean lower energy costs for our Montana customers more efficient use of renewables and greater power grid reliability. As Brian mentioned we continue to monitor costs labor benefits and property taxes. We are recognized as one of the most efficient operators in the sector certainly among our peer group and have made expenditures on some -- what we think are especially important items over the last year. Turning to our capital investment forecast.
As you know we give a five-year look really by business segment and focus on projects that are known and identifiable. Based on what's depicted on the graph we would anticipate funding the expenditures with a combination of cash flows aided by NOLs and then long-term debt issuances. Obviously with the successful conclusion of the RFP we can add to that about a $20 million expenditure -- probably $40 million expenditure on the first portion of the supply investment and in addition to that the AMI investment in Montana. So essentially our capital plan going into next year is right around $400 million. And that's something we're very excited to take on. The last thing I will say is we did announce the addition of 2 new Board members. This is part of really the ongoing Board renewal. And I think many of you have met our Board members. We are proud of the governance that they provide and our governance is recognized again really as best-in-class.
Mahvash Yazdi will be joining us in December. She's got just an extraordinary record starting out with the Edison companies. 38 years of experience focused on strategy technology. This is just a wonderful person that's going to add an awful lot to the board. I imagine most of you know Jeff Yingling. He's currently a Senior Adviser in Investment Banking for Power Energy & Renewables at Guggenheim. He also has just an extraordinary career working in this industry over 35 years. He was a participant at this Board meeting and everyone management and the Board really appreciated the way he jumped in with both feet and made some real contributions just right throughout the meeting. So we could not be happier than to welcome both Jeff and Mahvash to the Board. And that's the end of my filibuster except that Brian referred to the perfect storm of weather.
And Brian I would -- it sounds to me as you were describing it it was the imperfect storm.
Brian B. Bird -- Chief Financial Officer
Yes the imperfect storm is probably better Bob.
Robert C. Rowe -- President and Chief Executive Officer
And with that after your questions.
Questions and Answers:
Operator
[Operator Instructions] The first question will come from Michael Weinstein with Credit Suisse.
Michael Weinstein -- Credit Suisse -- Analyst
Hi, guys, Michael, Just to make a run at kind of a preview of what you guys are going to be talking about at EEI. With a -- the rate increase is about $6.5 million of actual revenues coming in this year. Most of it has actually already flowed into results for this year right since April. And I'm just wondering what -- given that most of that's already kind of in there and the impact is pretty small relative to the 6% to 9% total return target. What kinds of other factors might help boost earnings growth going into next year to get you to actually into that target range?
Brian B. Bird -- Chief Financial Officer
Michael this is the only information I'll give before the next couple of weeks but it's really going to be a combination of 2 things. We're not only going to have as you might expect relatively low growth from a gross margin perspective think of our organic growth but there will be some organic growth from a margin perspective. But we intend to actually decrease expenses on a year-over-year basis in order to achieve that growth rate.
Michael Weinstein -- Credit Suisse -- Analyst
Okay. I mean I know you said it's the only thing you're going to say but is there -- are there any specific categories of expenses that might be -- we will be focused on?
Robert C. Rowe -- President and Chief Executive Officer
We'll provide you a nice chart with ranges in a couple of weeks.
Michael Weinstein -- Credit Suisse -- Analyst
Okay, great. I'll wait until then. Thanks.
Brian B. Bird -- Chief Financial Officer
Thanks, Mike.
Operator
Thank you. Our next question comes from Julian Dumoulin-Smith with Bank of America.
Julian Dumoulin-Smith -- Bank of America -- Analyst
Hey, how are you? Good afternoon, All right. Let me take a second run at this if I can. So with respect to this cost reduction effort you said in your remarks that 2019 might otherwise look like a heavy lift but for cost reductions that you're pursuing in the fourth quarter. How do you think about the sustainability of those cost reductions? And truly is the fourth quarter run rate and implicit decline a good way to think about those cost reductions you just alluded to '20? Am I thinking about that right?
Brian B. Bird -- Chief Financial Officer
I think it's fair to say that directionally that will help. I don't think that will paint the full picture and I'll stop there Julian.
Julian Dumoulin-Smith -- Bank of America -- Analyst
Got it. And can I elaborate -- can you elaborate on what's driving at least the fourth quarter here in terms of sources?
Brian B. Bird -- Chief Financial Officer
I think we -- I would just say this there's certain -- we went after certain expenses we've talked about during the first nine months of the year and we made great progress. Certainly some of that spend we don't expect the same high levels in the fourth quarter. And I think on a year-over-year basis they're pretty high spend in the fourth quarter last year. And I think timing is probably the best way to describe it.
Julian Dumoulin-Smith -- Bank of America -- Analyst
Got it. All right. Excellent. And then can I -- if I can ask at a higher level you talked about the 6% to 9% long-term total shareholder return off of 2019. How do you frame that into 2020 again given some of the dynamics that you just alluded to? And then more importantly just over the longer term how do you think about the sort of potentially lumpy nature of that given the timing for the next rate case? And that might be a back-headed way to ask you about rate case timing in your jurisdictions.
Brian B. Bird -- Chief Financial Officer
Yes. I think we'll give you more clarity on that in April as we usually do and we'll talk about all jurisdictions at that time and the timing. I think it is fair to say from our perspective that in light of the low -- relatively low organic growth in our business there's going to be more frequent rate cases than we've had historically. And I'll leave it at that.
Julian Dumoulin-Smith -- Bank of America -- Analyst
That is a fair statement. So perhaps if I can just squeeze in another real quickly here. As you think about the balance sheet side of ledger and you've alluded to some of the South Dakota capex here how do you -- how should we think about incremental financing needs etc. just again high level? I know that we're going to get some more capex details here in a little bit but at least kind of preliminarily and maybe even specifically to South Dakota.
Brian B. Bird -- Chief Financial Officer
I would say this -- we did say and Bob alluded to the fact that in our capital plans our current plan as you see in our 10-K and we've shown in this document as well we do not need equity to finance that. As we add generation and approximately $80 million of incremental generation will have pressure and we'll be focused on our FFO to debt coverages and we want to make sure we maintain our BBB flat ratings. And as a result we may have to issue equity in order to finance that incremental growth. So we're keeping an eye on that. My expectation is if we were to do anything like that you might utilize an ATM or some other means like an ATM program to finance that. And in light of the fact that this is going to take two years to build the timing of when you would do that is certainly not something we would contemplate today but maybe later in the -- in 2020 or potentially even 2021.
Julian Dumoulin-Smith -- Bank of America -- Analyst
All right, I'll leave it there. Thank you very much.
Operator
Thank you. Our next question comes from Brian Russo with Sidoti.
Brian Russo -- Sidoti -- Analyst
Good afternoon everybody, Just to clarify the 2019 guidance of $338 million to $348 million that assumes normal weather for the entire year. So at year-to-date you're kind of at a net positive of about $0.10 but that's excluded from the guidance correct?
Brian B. Bird -- Chief Financial Officer
Yes. I would just say on a year-to-date basis that's already a -- we're starting -- our starting point if you will is a weather-adjusted number already. So then the assumption is assuming weather for the last quarter as well.
Brian Russo -- Sidoti -- Analyst
Okay. Got it. And then just on the cost side year-to-date costs are up quite noticeably not unexpected and I think it's partly due to pension expense and accelerated tree trimming. So is that something that's going to reoccur as we move forward? Or like other utilities for industry reasons I guess have accelerated expenses into 2019 which could alleviate some of those expenses beyond 2019?
Brian B. Bird -- Chief Financial Officer
Yes. I would say this that our vegetation management is extremely important to us. Hazard trees are important as well in light of what's happening in west of us. I think we've made great strides in terms of accelerating those expenses this year maybe a bit more even than we initially had planned. And so as a result of that it made great progress but we'll still have a relatively high spend from a vegetation management perspective.
Brian Russo -- Sidoti -- Analyst
Okay. Got it. And also just to be clear the assumption in guidance for interim rates is that beginning April 1 of 2019 so you'll see a lift for new rates in the first quarter of 2020?
Brian B. Bird -- Chief Financial Officer
On a year-over-year basis first quarter '20 versus first quarter '19 yes would be higher in '20 because of the rates we showed that go on in effect as a result of the stipulation at April 1 of 2019.
Brian Russo -- Sidoti -- Analyst
Okay. So you're going to see the benefit of both the lower depreciation plus whatever the $6.5 million of annualized revenue is in the first quarter?
Brian B. Bird -- Chief Financial Officer
Only revenue.
Brian Russo -- Sidoti -- Analyst
Only revenue. Okay. Okay. Got it. And then on the South Dakota self-build what's the regulatory process? I believe you get into a rate case to recover that and will just collect AFUDC in the meantime?
Robert C. Rowe -- President and Chief Executive Officer
We'll be looking at regulatory options as there's more definition around the project. What I'd say at this point is we've had good communication with the commission throughout the RFP up to the decision but we'll be making specific regulatory decisions over the coming months and we'll be able to discuss those with you.
Brian Russo -- Sidoti -- Analyst
Okay. So another option besides a rate case could possibly be a rider?
Robert C. Rowe -- President and Chief Executive Officer
South Dakota has a phased-in rate plan statute that was actually originally adopted to moderate rates as generation was developed but then subsequently it was extended to electric delivery infrastructure as well. So we'll look at that as an option probably -- possibly in conjunction with other approaches.
Brian Russo -- Sidoti -- Analyst
And when might you expect to get more clarity on the ultimate size of the plant or the cost to then move forward on the regulatory recovery side?
Robert C. Rowe -- President and Chief Executive Officer
I'd say by the second quarter.
Brian B. Bird -- Chief Financial Officer
Would you say -- and I would say by February I think February we have that information by then.
John Hines
Yes we -- this is John Hines. We're looking at it no later than mid-January at this point in time for final selection to contract signed.
Brian Russo -- Sidoti -- Analyst
Got it. And then just from an AFUDC perspective should we just average it over the 2 years? Or is it going to be more front-end loaded back-end loaded?
Brian B. Bird -- Chief Financial Officer
I think for your assumption purposes that sounds like a good way to do it.
Brian Russo -- Sidoti -- Analyst
Okay. And when can we expect comments from the Montana Commission on the supply plan that was filed in late August?
Brian B. Bird -- Chief Financial Officer
What we know is they've scheduled the 2 public meetings for December 9. And we don't know what specifically they might do after that.
Brian Russo -- Sidoti -- Analyst
Okay. So in that forum they can convey comments? They will receive comments but will they give?
Robert C. Rowe -- President and Chief Executive Officer
Correct. Yes. And you probably know that we had posted the draft plan online and set up a vehicle for receiving comments online and then responding to those comments there as well. And all of that is incorporated in what we filed with the commission.
Brian Russo -- Sidoti -- Analyst
Okay. And then are there any brownfield sites available in or around the state of Montana?
Robert C. Rowe -- President and Chief Executive Officer
Montana is an industrial state. There are all kinds of locations. I really don't want to say anything more what might be bid in by anyone.
Brian Russo -- Sidoti -- Analyst
Got it. Thank you very much.
Brian B. Bird -- Chief Financial Officer
Thanks, Brian.
Operator
Thank you. Our next question comes from Vedula Murti with Avon Capital.
Vedula Murti -- Avon Capital -- Analyst
Hi, good afternoon. I guess I'm wondering what items are still outstanding in terms of the Montana settlement that need to be signed off by the commission. I think the items -- based on the items that you I think articulated earlier I'm not sure whether equity ratio and ROE and some other items or rate base were -- are still outstanding. What are the other moving pieces that are still outstanding since they didn't just simply sign off on the entire settlement as was proposed?
Robert C. Rowe -- President and Chief Executive Officer
So the revenue required -- we obviously have to wait to see the specific language in the commission's order but the vote was 5-0 to approve the revenue requirement stipulation 5-0 to approve the stipulation concerning green pricing. There's also a stipulation ending concerning various policies to promote energy efficiency and to align energy efficiency investment with the business. There is the specific proposal from NRDC for a version of decoupling which we supported. There is the important issue of addressing the intra-class cross subsidy in the current net metering pricing structure. And there we and the consumer counsel had both proposed that the net metering and non-net metering portions of the current residential class be separated and that a demand charge at some level be established and various other rate design issues particularly for the residential class that weren't included in the overall revenue requirement stipulation.
Vedula Murti -- Avon Capital -- Analyst
So essentially the fact that you've had interim rates based on the stipulation would mean as long as the remaining items are approved that are consistent and any potential incremental refund or adjustments is unlikely. But the fact is is that the current rate structure and going through until -- from now to April 1 when this is first initiated is consistent?
Robert C. Rowe -- President and Chief Executive Officer
We really need to see a final order to answer every part of your question. I think in a general sense we're obviously very pleased with the commission's action today. And the fact that it was unanimous and the fact that they've laid out a proposal to address the remaining issue which obviously we have great interest in the decisions that are still in front of the commission. And what I'm particularly concerned with is to move toward the situation that better aligns public policy with the business plan and without costs are incurred. If we can make a few more steps along that pathway I think that would be great. But the decision the commission made today really was key and was important and was constructive.
Vedula Murti -- Avon Capital -- Analyst
Okay. And I want to make sure I'm not confused in terms of I think you said December 9 in terms of like the resource plan that you provided. My recollection is is that it will simply be accepted as something that would then go through a full process? Because my recollection is is that the capacity that you're seeking to have an opportunity to provide to deal with the -- your resource deficiency you believe exists. A final decision where you and us would all know whether you'd be able to make those capital investments isn't -- would not be adjudicated until about this time next year. Is that correct?
Robert C. Rowe -- President and Chief Executive Officer
John why don't you go ahead and speak to that?
John Hines
Okay. The RF -- the procurement plan process is what goes through what we call a non-contested case process where the commission will receive comments from external parties. That's what's taking place in public meetings on December 9. Some point after that they will provide comments on the plant. These are nonbinding comments and informational in nature. Obviously we take them into consideration. However the plan is very specific on the critical need for the replacement of capacity especially as Pacific Northwest becomes shorter and shorter in capacity and the roll-off of Colstrip 1 and 2 in Montana. And so we will be moving forward with a competitive solicitation process likely at the end of Q4 here in 2019.
Vedula Murti -- Avon Capital -- Analyst
And then that's the -- after you initiate that solicitation it'll be devaluation of solicitation and then that termination that will occur toward about this time next year such that any potential self-build options that might -- that could help address the shortage that you see we'd know whether you've been chosen or not?
Robert C. Rowe -- President and Chief Executive Officer
That's correct. And the solicitations as I mentioned will be open to bill transfer to PDA to demand management approaches. It will be truly all-source but focused on the identified need. As John said the process in Montana is non-adjudicative in contrast to different states but it still is a very important process and the commission will have the opportunity to issue comments as it did on the 2015 plan. Beyond that what I would say is in 2015 we had a pretty robust agenda of outcomes from the plan. We were able to move forward on most of those but in part because of decisions made by the Montana Commission at that time in almost unrelated dockets in terms of symmetry of contract length we had to cancel that RFP which really allowed the capacity hole that we're in to just get that much deeper over the intervening years. Now since that time there has been really almost unanimous appreciation of the situation that we face in Montana and in the region. The entire region is concerned about capacity shortage. In fact there was a regional meeting that a number of us participated in just about a month ago. Lots of studies have been done. Part of that obviously has to do with the retirement of existing resources. For our Montana customers the situation is that much more acute both because the peaks are more severe and more sustained and because still the vestiges of supply deregulation we have -- we're the only company in the west that has a negative reserve margin negative 27% as you know. So we are in a hole. We're trying to be responsible and efficient about working with others in Montana to get out of the hole.
Vedula Murti -- Avon Capital -- Analyst
And just so I'm clear though I mean when we come see you in a couple of weeks here in Florida and then when you report year-end in February the capital program that we currently see here the only updates aside from the base program and putting in the South Dakota RFP allocation to you there will not be the ability to put in anything relating to your efforts in Montana because you will simply not have a conclusion there and that's going to be something that would be toward the end -- toward about this time next year and that would be in the roll forward capital program for -- come late '20 for 2021 and beyond.
Brian B. Bird -- Chief Financial Officer
Yes. I would say it this way Vedula for 2020 we can speak to that with some more clarity at the -- at EEI. For February this is when we update our 10-K for our capital plan out for five years you should not expect to see anything in there for Montana self-build. We obviously have no idea and so there will not be any of this built in our capital plan for that.
Vedula Murti -- Avon Capital -- Analyst
Okay. And also I read something about someone who wants to be the Chairman of the MPSC who I think seems to like the more competitive markets and having alternative providers for meeting the generation depths that you guys are seeing or whatever. Can you kind of speak just to kind of how the environment has changed since Mr. Kabila has left? And was kind of thought that things would be such a free market type or more like wanting to have assets built by third-parties? How that's -- whether -- how are you seeing things here?
Robert C. Rowe -- President and Chief Executive Officer
Sure. There will be several -- in Montana several Public Service Commission elections. In some cases there will be primaries as well as a general and then ultimately the members of the commission select who the chair is. I think your reference was somebody running to be chair. We want everyone who's running for those positions or others running for other office in our service territory to have as much information about the company about our responsibilities in that jurisdiction as we possibly can. So we're eager to provide good factual information specifically as to supply planning the commission is -- the commissions are really functions of the authority granted them by the legislature number one. Number two we are using competitive solicitation processes for electric supply planning both in South Dakota and in Montana. Number three in Montana there was a comprehensive electric supply planning statute passed with the leadership of another legislator who's running for the Public Service Commission and that was legislation that we supported.
Vedula Murti -- Avon Capital -- Analyst
So is this an election that's going to be happening this November here in 2019? So we'll have a new composition that's going to then be evaluating the resource plan and the solicitation that's kind of being developed right now?
Robert C. Rowe -- President and Chief Executive Officer
No. Candidates are out beginning to talk. We don't know ultimately who will be running for what office beyond the folks who have announced. There will be primary elections next spring and then general elections in November of 2020 to take office in January of 2021.
Vedula Murti -- Avon Capital -- Analyst
Okay, thank you very much.
Operator
Thank you. [Operator Instructions] Our next question will come from Jonathan Reeder with Wells Fargo.
Jonathan Reeder -- Wells Fargo -- Analyst
Hey, Bob and Brian I just wanted to clarify one quick thing. On the capex budget in your prepared remarks Bob did you say you expect to spend like $400 million next year?
Robert C. Rowe -- President and Chief Executive Officer
Yes. We expect our all-in capital budget next year will be right around $400 million yes.
Jonathan Reeder -- Wells Fargo -- Analyst
And that's driven by the South Dakota opportunity? And then did you say AMI in Montana?
Robert C. Rowe -- President and Chief Executive Officer
Yes. The capital that we've been discussing for a number of months is a pretty robust capital project overall. The additions coming out of our Board meeting are the generation in South Dakota and beginning work on AMI in Montana.
Brian B. Bird -- Chief Financial Officer
If I could Jonathan just for everybody the pretty simple math is if you take 2020 from that schedule of $332 million add approximately $40 million for the South Dakota generation and another $25 million from Montana AMI you're at $397. So in essence that might not be exactly the number for -- but to Bob's point it's going to be approximately $400 million.
Jonathan Reeder -- Wells Fargo -- Analyst
I like you putting it down like that for a simple guy like myself. I appreciate it. Brian if you could could you kind of go through what the miscellaneous items were both gross margin and cost-wise that have really piled up year-to-date? And how we should think about those? I guess going forward are they timing related? Do they go away in 2020?
Brian B. Bird -- Chief Financial Officer
Yes. I would tell you on the margin front in both cases unbilleds are the biggest drivers. I mean there are quite a few things that add up to the $2.3 million for the quarter and $2.1 million I think for the other if I recall those numbers. But the biggest drivers in each of those cases were unbilleds that jump out for me on the margin front. On the cost side -- and there are pretty big others. And I think as a company we made some conscious decisions in this year to catch up on some expenses. And we also had an IRP process. We had a South Dakota RFP. We had some insurance reserves. We had some higher BT costs. We've had some compliance costs that we had to. And these things as a stand-alone basis don't add up. But Jonathan there's literally about 2 dozen things I could quantify if you want to talk about things that are in the $100000 range. And so I'm not going to go through that. But I kind of mentioned maybe the bigger hitters.
Jonathan Reeder -- Wells Fargo -- Analyst
Okay. Because yes I mean on the cost side I think it was like over $6 million year-to-date which -- that's a big number for you guys. So it sounds like for those we should expect the bulk could go away. You'll obviously still have IRP costs with Montana and stuff. But is that kind of fair that that's one of the buckets I guess we should be thinking about when we look at overall cost for next year?
Brian B. Bird -- Chief Financial Officer
Yes. Again these are all costs that are under $1 million that I've just specified. And so some you're right are going to be repeated some from our perspective we don't expect to see next year. So I can't really answer that directly Jonathan.
Jonathan Reeder -- Wells Fargo -- Analyst
Okay. And then my other question is just the lower transmission revenues. Is that going to be I guess kind of a new normal going forward since you said it was related to lower activities at the Colstrip plant?
Brian B. Bird -- Chief Financial Officer
Yes. I think in fairness we -- at Colstrip some long-term contracts have rolled off and we've just seen -- as a result of that we've seen fewer activity during the quarter. We have seen when there's some more variability in pricing that there is some more movement if you will across our lines. But I think I would put it in this content -- context I don't expect us to see higher oasis in 2020.
Robert C. Rowe -- President and Chief Executive Officer
The thing to add to that is that there is renewed interest in developing renewable resources in Montana for exports. There's an awful lot of activity around that more than we've seen in probably a decade. So we certainly welcome that and want to work with those parties.
Jonathan Reeder -- Wells Fargo -- Analyst
Okay, thanks. Look forward to seeing you guys.
Operator
Thank you. Our next question comes from Vedula Murti with Avon Capital.
Vedula Murti -- Avon Capital -- Analyst
Just a couple of other little follow-ups here. Can you remind me at least historically or what we should -- in terms of maybe the current rate stipulation there's always like a structural lag in terms of items that are excluded in terms of relative to the ROE that's underlying. Could you remind us dollar value and the basis points that's usually tied to that?
Brian B. Bird -- Chief Financial Officer
Vedula I'm not sure if I'm following your question. Are you getting at generally at lag as a whole or...
Vedula Murti -- Avon Capital -- Analyst
Yes. Like for instance just like historically if you're under your normal operations here I'm going to make up the number let's say you're earning you're authorized at 9.5%. My recollection is just like there's usually 70 or 80 basis point structural lag because there are expenses that simply are not granted that would then effectively turn 9.5% into like 8.7% or an 8.8% or whatever?
Brian B. Bird -- Chief Financial Officer
Yes. I don't have -- I don't know what that would be. It's my expectation that that is a pretty small delta but I don't know for sure.
Robert C. Rowe -- President and Chief Executive Officer
You're talking about things like stock-based compensation for example.
Vedula Murti -- Avon Capital -- Analyst
Yes. Yes. Exactly. And -- there's always certain things that seem like that's always there.
Robert C. Rowe -- President and Chief Executive Officer
And that would be the case but again as Brian said pretty small.
Vedula Murti -- Avon Capital -- Analyst
Okay. Also I'm looking at the DD&A it's like on an annualized basis entire run rate that's looking like about $175 million. So if I'm thinking about that versus capex if -- should -- is that basically going to be like fairly reasonable going forward and with some modest increases? Or are there any major changes that should we think about with DD&A ?
Brian B. Bird -- Chief Financial Officer
Think we might be able to share some more light on that at EEI but I...
Vedula Murti -- Avon Capital -- Analyst
Okay. All right. And one last thing given the cost initiatives you're -- you discussed earlier and that you're just trying to get a rate stipulation approved there -- is there any reason for us to think that you'll file immediately this year? Or do you feel like the cost initiatives and having stipulation can at least buy you years so you can wait and see what happens with some of the RFPs and then contemplate a potential refiling year...
Brian B. Bird -- Chief Financial Officer
You might have missed that earlier on the call Vedula but I've mentioned that we would talk about any particular rate case filings in April but that's our normal cadence we'll speak to all jurisdictions at that time.
Vedula Murti -- Avon Capital -- Analyst
Okay. Oh, thank you very much.
Operator
[Operator Instructions] So I'm currently showing no further questions. I'd now like to turn it back over to management for closing remarks.
Robert C. Rowe -- President and Chief Executive Officer
Okay. Great. Well again thank you all very much. It was low-teens today across South Dakota and below in Montana. So that's yet another reason we're looking forward to seeing you all at Disney World in a couple of weeks.
Operator
[Operator Closing Remarks]
Duration: 63 minutes
Call participants:
Travis Meyer -- Investor Relations
Robert C. Rowe -- President and Chief Executive Officer
Brian B. Bird -- Chief Financial Officer
Michael Weinstein -- Credit Suisse -- Analyst
Julian Dumoulin-Smith -- Bank of America -- Analyst
Brian Russo -- Sidoti -- Analyst
John Hines
Vedula Murti -- Avon Capital -- Analyst
Jonathan Reeder -- Wells Fargo -- Analyst
