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NorthWestern Corp (NYSE:NWE)
Q3 2020 Earnings Call
Oct 22, 2020, 3:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the NorthWestern Corporation's Financial Results Conference Call and Webcast. At this time, I would now like to turn the conference over to NorthWestern's Director of Corporate Finance and Investor Relations Officer, Travis Meyer. Please go ahead, sir.

Travis Meyer -- Director of Corporate Finance and Investor Relations Officer

Thank you, Casey. Good afternoon and thank you for joining NorthWestern Corporation's financial results conference call for the quarter ending September 30, 2020. NorthWestern's results have been released and the release is available on our website at northwesternenergy.com. We also released our 10-Q premarket this morning.

Joining us on the call today are Bob Rowe, President and Chief Executive Officer; Brian Bird, Chief Financial Officer, along with other members of our executive team on the call with us today to address questions if necessary.

Before I turn the call over for us to begin, please note that the company's press release, this presentation, comments by presenters, and responses to your questions may contain forward-looking statements and non-GAAP financial information. 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 Litigations and Reform Act of 1995.

Forward-looking statements often address our expected future business and financial performance and will often contains words such as expect, anticipates, intends, plans, believes, seeks, or will. This information is presented 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 10-K and 10-Q along with other public filings with the SEC.

Today's presentation also includes non-GAAP financial measures. Please refer to the definitions and reconciliations of these measures that are included in our webcast materials. Following the presentation, we'll open the phone line 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 PM Eastern and can be found on our website, again, at northwesternenergy.com under the Our Company, Investor Relations, Presentations and Webcast link.

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

Robert C. Rowe -- President and Chief Executive Officer

Thank you very much, Travis. If you're looking at the deck, you'll see that Travis included some beautiful fall foliage. Unfortunately, for better or worse, if that picture were taken today, it'd be white. At least I've been out shoveling snow a couple of times already and it looks like I'd get to shovel a couple of more times over the next few days as well. But it's a beautiful photo.

Well, for the third quarter, net income increased $7.8 million as compared to the same period last year. This was primarily due to higher gross margin, lower OG&A and favorable income tax, but offset, in part, by higher depreciation and higher property taxes. Diluted EPS increased $0.16 or 38.1% as compared to this period last year. Diluted non-GAAP EPS increased $0.09 or 18% per share after adjusting for normal weather. The Board, in our meeting this week, declared a quarterly dividend of $0.60 per share payable on December 31 to shareholders of record as of December 15.

We've talked a lot about how our employees have just done such an incredible job during the, now a year, of COVID and that continues to be the case. So we have to shout out to them at the bottom, just in terms of exceptional employee safety and renowned good health and our safety focus and great customer satisfaction, both at, near or all-time highs, and this is despite the COVID emergency operating pressure continuing in place.

Now, I will turn it over to the most talented and admired Chief Financial Officer in the business, Brian Bird.

Brian B. Bird -- Chief Financial Officer

Thanks, Bob. One thing you should consider, Bob, is a snowboard, might make a good Christmas gift for you.

On Page 4 of the deck is our financial results for the quarter. It was a good quarter. It's nice to see margin was up. Operating expenses were down. Other income was up and we had a nice tax benefit for the quarter, resulting in a $7.8 million improvement in net income or approximately 36%. From a diluted EPS perspective, $0.58, that was a $0.16, or 38% improvement for the quarter.

Going to the next page associated with gross margin. Gross margin was up $2 million or approximately 1%. If you look at those items in gross margin that have an impact on net income, the one I'll focus my most attention on is the electric retail volumes and demand. We did have favorable weather versus the prior year. That, plus, customer growth were partially offset by COVID impacts and industrial loads. Speaking of COVID impacts, we did forecast a $2 million to $3 million net impact due to lower commercial and industrial usage, partially offset by increased residential usage. So again the biggest driver for the $2.9 million change in gross margin was the impacts to electric retail volumes and demand. Those items that didn't impact gross margin that are offset elsewhere in the P&L totaled unfavorable $900,000 for an increase in gross margin of $2 million.

Moving ahead to weather, I'll be pretty brief here. Versus our historic average or we deem normal, we were unfavorable of about $600,000. Cooler Montana weather more than offset the warmer South Dakota weather. We were $5.1 million of better on a year-over-year basis and better because we were both warmer in Montana and South Dakota than we were in 2019.

Moving to operating expenses on Page 7. Operating expenses were actually down $1.4 million or approximately 1% driven by the nice reduction, nearly 5% reduction in operating, general and administrative expenses. Focusing there, $2 million reduction in employee benefits, down just over $1 million in hazard trees and labor and nearly that much in generation maintenance, were more than enough to offset the $2.4 million increase in uncollectible accounts for the quarter for a net change for those OG&A Items impacting net income of $3.1 million net decrease. Below those items, offset elsewhere in the P&L, they totaled $600,000, so for a net decrease in OG&A of $3.7 million.

Back to COVID, we did note that the $2.4 million increase in uncollectible accounts was partially offset by other COVID-related expense items that were about $1.2 million lower. I'll give a full P&L impact here in a moment. Also on the operating expense side, we did see an increase in property tax, increase in depreciation expense primarily due to increased plant additions.

The next page, operating to net, on Page 8. Operating income up about $3.3 million or 7%. Below that we had flat interest expense, a nice improvement in other income, primarily due to AFUDC for a pre-tax benefit of $4.6 million or nearly 21%. And below that, we had a $3.3 million favorable year-over-year tax item which netted then a $7.8 million or 36% improvement in net income.

Speaking of income taxes on Page 9. At the bottom of the page, you will see in the first or for the three months ended September 30, 2020, we had a $2.7 million benefit, that was a $3.3 million improvement over the prior year period. We had better flow-through repairs, better production tax credits and our prior year permanent return to accrual adjustment was better on a year-over-year basis. Those more than offset the tax item associated with higher pre-tax income.

Moving forward, on the balance sheet, really not much to report here, not a lot of changes, but at the bottom of the page, we focus on debt to cap, expected change you can see during the year in September versus a year end number, it's well within our 50% to 55% debt to cap.

On cash flow on Page 11, $69 million improvement in cash flow, primarily driven by an improvement in working capital, that is primarily driven by improved supply cost recovery. And then you might recall in 2019, we had TCJA refunds that we gave to customers. Those are the biggest drivers on a year-over-year basis in working capital. That improvement of -- $97 million improvement in working capital is offset to a great extent by the reduction in net income on a year-to-date basis. But then, again, a net $69 million improvement. That increase in operating cash flow allowed us to invest approximately $40 million more in PP&E for the first nine months, and we continue to have an accelerating capital program and the incremental cash flow, certainly helpful in that regard.

Moving on to Page 12 is our adjusted non-GAAP earnings for the third quarter. The bottom of the page, you see diluted EPS on a GAAP basis of $0.58, we did add back $0.01 to be at $0.59 for the quarter. That compares to a $0.50 2019, three months ended September 30, that was adjusted for unfavorable weather as well. So $0.59 versus $0.50 or a $0.09 improvement on a non-GAAP basis, 18%, very nice for the quarter. If you look at the middle column, the non-GAAP variances comparing non-GAAP year-over-year, gross margin is still down, which makes sense when you back out the favorable weather and you think about COVID, you think about some of the industrial impacts. But that was more than offset by the improvement -- by OG&A and the improvement in income tax for the quarter for a net improvement again on a non-GAAP basis of $3.9 million or 15%.

Now, turning to the next page, our diluted earnings per share. We affirm our previously revised earnings guidance of $3.30 to $3.45 per diluted share. We do mention -- highlighted here, two of the assumptions. We have continued to see COVID impact our business. I think it's manageable and certainly, to hit our guidance, if we're somehow wrong in terms of those assumptions that could impact our guidance certainly. Next, we also expect regulatory recovery of COVID 19 related uncollectable account expense and are looking forward to seeing the final order from the Montana Commission on that topic.

I should also point out the bottom of the page, we did, I guess, backed away from the 6% to 9% total shareholder return in light of a very attractive dividend yield, close to 5%, as we felt it more important to switch to a long term earnings growth rate, 3% to 6% were granted, that's a pretty wide range. But I think folks know we have to -- in order to get recovery of our invested capital, we need to go in for rate cases that can then result in lumpy results. But it's also -- it has a -- at the high end of that range, if we're able to execute on our generation growth, we feel confident we can achieve that higher end of that range.

In light of that, I would say, from a TSR perspective, if in fact we felt the long-term range, if you will, from a dividend yield perspective was a 4%, I would argue that our TSR is probably more 7% to 10% going forward. And I also would say we're getting quite a few questions. When you talk about long-term earnings per share, what is your base year? What I'd say in that regard is, think of 2020 as a base year. But also think of -- since 2020 was impacted significantly by COVID, we should do better than 3%, certainly in that regard. So again the 3% to 6% is a long-term rate, but from a base year -- we're using 2020 as a base year. We should do better than 3%.

Moving forward, Page 14. We did update our earnings bridge. We had quite a bit of continued COVID impact in the third quarter, excuse us, and we expect to continued into the fourth quarter. As a result, we did reduce our expectations from gross margin by $0.08. But we -- as we pointed out in the last quarter, we do expect to continue to, if that's the case, to stay focused on cost control and we do expect some recovery there from an OG&A expense perspective and from income taxes to offset that. That's to the far right. You can see on that page, to the far left, we do show our actual Q1 to Q3. We've done a nice job from an OG&A expense perspective, offset gross margin.

But you can see why we needed to revise earnings guidance, if you will, through the first three quarters. We certainly didn't -- weren't able to do enough to offset property tax, depreciation and interest expense. So behind $0.17 on a year-over-year basis through the first three quarters. Our forecast for the fourth quarter is in the middle of that page. And you might be curious as to why we think we'd do $0.08 to $0.14 in gross margin in the fourth quarter. Well, one thing to point out is two lines below that is property and other tax expense. We did have a favorable adjustment in the fourth quarter of last year, and thus, we had headwinds of $0.10 to $0.11 of property taxes this year. Remember, we do get recovery of that in our tracker 75%. So that is an add to gross margin up above.

We also mentioned on earlier calls about unbilled timing, should have a favorable impact on our fourth quarter results as well. Those two favorable items will be offset to a degree by COVID in the fourth quarter. We also point out an improvement of $0.06 to $0.09 from OG&A. As you can see, in Q2 and Q3, we were able to achieve $0.18. We feel confident we can continue at that high level of cost control. I mentioned property taxes and lastly incremental tax benefit. I did talk about timing and also I think people understand the fourth quarter is a large earnings quarter for us. On a proportionate basis, we get a lot of our favorable tax attributes and proportionate to our earnings. So we do expect some favorable improvement in the fourth quarter there as well.

Turning to the next page, COVID impacts on margin expectations. We were really good at forecasting the second quarter, not so good in the third quarter. But we weren't very good on residential either and we did quite a bit better on the residential side, worse on the commercial, and significantly worse on industrial. I'd point out, the big reduction in industrial, though, were two choice customers, Bitcoin operators. They're primarily -- their choice customers invest -- their bills primarily are made up of demand charges, so less of an impact from an earnings perspective for us and part of the $2 million impact I mentioned is associated with industrials.

Now, the fourth quarter, we are forecasting it slightly different than our original forecast, little bit higher in residential, a little bit worse on commercial and certainly, in industrial, we do expect one of those large industrial customers back online in the fourth quarter. Again, we will continue to be focused on O&G expense control to offset impacts of COVID.

Now, moving forward on the expense expectation. Expenses were pretty much in line with our expectations associated with COVID in Q3. We weren't able to receive the recovery mechanisms in the third quarter. Hopefully, it does -- both come in the fourth quarter and that will help us in that regard. But otherwise in pretty good shape. At the upper right of this page, we do show a table of the second quarter, it's shaded. We had 6% to 7% -- excuse me, $0.06 to $0.07 of EPS impact, we show $0.05 to $0.06 in the third quarter, a little bit better than Q2.

With that, I'll hand it back over to Bob for Page 17.

Robert C. Rowe -- President and Chief Executive Officer

All right, thank you very much. We'll start with the capital forecast and you've seen our version to this over the last few quarters. And here we're reflecting $1.8 billion of total capital over the next five years. I'll provide just a little bit more color on that. But we anticipate financing with the combination of cash from operations, aided by NOLs, first mortgage bonds and equity issuances. And as we've discussed, we expect to issue equity in 2021 and the -- a goal of that of course is to maintain and protect the current credit ratings as we balance that with our capital needs and plans. This is a great long term capital plan. It does include, as reflected in the chart, $80 million of incremental capital for South Dakota generation, between '20 and '21. It does not include investment necessary to identify -- to address other identified generation capacity issues particularly in Montana. And these could increase the capital forecast.

Notably, at this week's meeting, the Board of Directors approved, going forward, with needed generation at Aberdeen, South Dakota, that would be capital between '21 and '23 of about $65 million total. This is an important investment. We're very excited that the Board has supported that. We are really still finalizing our capital program right now. We've got a robust capital process focused on the projects with the greatest value on our system, sequencing the projects, prioritizing them and coordinating them. And what's significant is, In addition to the supply needs, that there tends to be quite a focus on, we will be investing substantial amounts in really all aspects of the business. And this has to do with ensuring reliability, but also the long term modernization of the delivery network. So we'll be talking to you more at EEI for example as our capital plans develop. But it really is very, very exciting work.

A couple of other items, and I expect we'll come back and talk more about these. We did request accounting orders in Montana and South Dakota, allowing us to defer uncollectible accounts, associated with COVID. The South Dakota Commission issued an order in August authorizing deferral of costs for possible recovery in future rate cases. The Montana Commission held a work session in October, we expect to receive a final order from the Montana Commission in the coming weeks. As you know, in the last Montana rate case, the Montana Commission did approve a pilot Fixed Cost Recovery Mechanism and then as COVID set in, we did request the Commission to delay that pilot for one year, so that it would start July of 2021. And the Commission granted that request.

We have the companion FERC rate case for our Montana FERC jurisdictional transmission assets pending. We are well into settlement discussions there. When that case is resolved, then we would file a compliance filing with the Montana Commission and adjusting the FERC credit in our Montana retail rates. Obviously, you're following the proceedings associated with our agreement with Puget Sound Energy to purchase their share of Colstrip unit 4. As you know, Talen exercised its right of first refusal, so at this point, the focus is on the remaining 92.5 megawatts of Colstrip. There are parallel proceedings at the Washington Utilities and Transportation Commission and the Montana Commission.

Bit of an update there. The WUTC issued an order yesterday suspending the hearing that had been scheduled for November 23, and there will be a status conference concerning the dockets on October 29. Each year, we, of course, submit filings for recovery of electric natural gas and in Montana, for property taxes, the Commissions review these trackers and make their determinations based on either statutory or a prudency determination and inevitably we have dockets pending there.

Turning to the subject of resource planning. We talked about some of these projects already. In South Dakota, construction is already under way on a 60 megawatt flexible reciprocating internal combustion engine, an ICE, to be online in late 2021 and construction cost will be about $80 million. Concerning the Montana RFP, initial bids were submitted earlier this year. We are looking for up to 280 megawatts through a competitive solicitation and the -- that is essentially a blind process to us. So we did not know the outcome of the current round. We have submitted, or I should say, on our behalf, bids have been submitted -- proposed in long duration flexible capacity in excess of 200 megawatts. Those bids, like all the others, are being evaluated by the third-party and we expect the successful projects to be selected and announced by the first quarter and to meet our customers' needs, be online by 2023.

As I mentioned, we continue very robust investment programs in transmission and distribution. Those include, of course, the basics, but also really accelerating the evolution of our delivery system, particularly on the distribution side, where we are well into a multi-phase process to stand up a distribution operation center, where we're already seeing benefits in terms of just visibility into the network and also moving ahead with automation at the substation level. We are moving toward -- we have completed the AMI deployment in the electric parts of our South Dakota and Nebraska network. And we will be moving ahead with AMI deployment now in Montana as well.

We're also on schedule to enter the Western Energy Imbalance Market in April and from experience in SPP, we're certainly encouraged that this could mean lower energy costs for our Montana customers, more efficient use of renewables and greater power reliabilities. I've highlighted this before, as well, but really just as important as going into the EIM is our work in the Northwest with the Northwest Power Pool on regional resource adequacy. And there the goal is to really get a common tool to measure resources to assign capacity values and ultimately to determine as a region, as well as at the company level, what our resource adequacy position is.

And with that, we can open the call for questions and discussion.

Questions and Answers:

Operator

[Operator Instructions] We will take our first question from Michael Weinstein of Credit Suisse.

Michael Weinstein -- Credit Suisse -- Analyst

Hi, guys.

Brian B. Bird -- Chief Financial Officer

Hey, Mike.

Michael Weinstein -- Credit Suisse -- Analyst

Hey. Could you give a little more, I guess, color on what you're -- what kind of a fourth quarter you're assuming for COVID-19? In order to make guidance, is there -- how much extra savings do you have to come up with in order to offset your latest expectations?

Brian B. Bird -- Chief Financial Officer

Yeah, I think the bridge, Mike, I'll try to give an idea, the reason for the gross margin change on the bridge of $0.08 really is the answer to that question. We looked at kind of how things were trending in Q3. Expectation is, we're certainly seeing it in our service territory, COVID is, this year certainly more so than we forecasted, way, way back in April. So I would argue that's the best place to capture data is in the bridge date since there. And to answer your question, how we're going to offset that $0.03 incremental OG&A savings, $0.04 more taxes and then everything else nets for another $0.01.

Michael Weinstein -- Credit Suisse -- Analyst

Maybe you think the taxes will come through. I mean, OG&A, I can see you having more control over, but do you have that kind of control over the tax breaks?

Brian B. Bird -- Chief Financial Officer

Well, taxes -- we certainly -- I mentioned the attributes, we kind of have an idea in terms of expectations on fourth quarter based upon our pre-tax income during the quarter. We also had a favorable third quarter adjustment. And so from that, we -- net-net, we feel comfortable with the fourth quarter -- with the $0.08 to $0.12.

Michael Weinstein -- Credit Suisse -- Analyst

Is there any color you can -- got you. Is there any color you can share on the docket for cost recovery that, I guess, I think I heard you say would be another couple of weeks to get a decision from Montana?

Robert C. Rowe -- President and Chief Executive Officer

The Commission had their work session a couple of weeks ago. They actually did because they were concerned to get it out the door, gave staff direction to issue a notice of commission action approving our ability to issue and account for anything on the retirements on the pension funding side in terms of the COVID-related expenses. The discussion by the commissioners was very, very favorable, sympathetic. One commissioner made the comment that maybe we should have asked for more than just a recovery of the incremental bad debt. But because there wasn't a direction to staff to just issue an NCAA, we really do have to see the language in the order before our accounting department gets comfortable with making a decision. Brian?

Brian B. Bird -- Chief Financial Officer

Yeah, Bob, we were very -- we waited with bated breath for the accounting order -- final order [Indecipherable].

Michael Weinstein -- Credit Suisse -- Analyst

Gotcha. So currently it's about $0.09 of guidance, right, I think there's -- relying on getting that cost deferral?

Brian B. Bird -- Chief Financial Officer

You're saying COVID thus far?

Michael Weinstein -- Credit Suisse -- Analyst

Yeah. I guess in the guidance, I think you were assuming regulatory recovery of expenses. Right? I think, so far, to-date, through September 30, I'm counting around $0.09.

Brian B. Bird -- Chief Financial Officer

Yeah, that's -- you're right. For Q2 and Q3, if you add those up, it's about $0.09. We expected we're going to get some recovery, if you will. During the fourth quarter we are disconnecting for non-payment during this time period right now, that's reducing that total and thus the net Reg asset that we record, we expect it to be around $0.05, not the $0.09.

Michael Weinstein -- Credit Suisse -- Analyst

Okay, got you, got you. All right. And is -- I guess, when -- are there any updates you can give on the RFP? I guess you're -- you expect successful projects to be selected and announced by first quarter of '21, to be online by 2023. Is there any additional color on that? Any reason to -- that you might have to wait longer, let's say, than first quarter? Or is it...

Robert C. Rowe -- President and Chief Executive Officer

I don't think we'll have to wait longer. The commitment is made. If we hear that our projects don't make it into the next round, we will let you know about that. So [Indecipherable] in the Jazz standard [Phonetic] and not until you hear from me. And so far we haven't heard anything. We take that as positive.

Michael Weinstein -- Credit Suisse -- Analyst

And one final question, maybe you can just talk about the election coming up and how -- what we should be looking forward to the Commission in terms of how things are shaping up?

Robert C. Rowe -- President and Chief Executive Officer

There is an election coming up. There are three open seats, one incumbent in Billings is running for reelection, two of the incumbents, Lake and Koopman are termed out and the campaigns are extremely, extremely active. There is no public following on Public Service Commission races. So we'll all be eager to see the outcomes. What you heard me say probably every two years is regardless of who is elected, we are very, very eager to begin really taking on this deep as they're willing to go into our operations and our obligations to serve our customers and their constituents. And the reality of those jobs is there's just an incredible amount to learn.

And in fact, really there are opportunities I think for both the equity side and the credit ratings agencies to help with that educational process because what we do is invest in critical infrastructure and provide essential service. We can't do without the confidence and support of both debt and equity investors. But in terms of where the Commission elections are likely to go, I would really hesitate to make any predictions.

Michael Weinstein -- Credit Suisse -- Analyst

I guess, one final question on that same thing. Is Colstrip a part of the election conversation? Part of the campaigning at all? Or is it...

Robert C. Rowe -- President and Chief Executive Officer

I'm sure that it has and certainly doesn't mean you're talking about PSC races. There is lots of discussion around certain environmental issues, things like that. I couldn't point to specific comments around Colstrip one way or the other. And of course, there is the potential that anyone who is elected is going to be asked to make decisions around Colstrip, so a prudent candidate would want to be careful about making any overly prescriptive statements.

Michael Weinstein -- Credit Suisse -- Analyst

All right, thank you very much.

Operator

Thank you. And we will take our next question from Julien Smith of Bank of America.

Ryan Greenwald -- Bank of America -- Analyst

Good afternoon, guys. This is actually Ryan Greenwald on for Julien.

Brian B. Bird -- Chief Financial Officer

Hey, Ryan.

Ryan Greenwald -- Bank of America -- Analyst

I appreciate you taking our question. Can you guys provide some clarity on how you're thinking about the timing of equity into next year now? I know at one point you guys were saying late this year, early next year, but just curious how your thoughts have evolved there in terms of potentially mitigating dilution for 2021. And as we await resolution on bad debt recovery in Montana, is the outcome there going to influence how you guys are thinking about it and the magnitude?

Brian B. Bird -- Chief Financial Officer

Actually, Ryan, one thing that's going to really drive the magnitude is whether we're successful or not on the RFP. And we'll be -- we hope to be talking about the size of an equity that we'll need in the February-April timetable. And we certainly feel comfortable going into 2021, but that will be about the time you'll hear something from us on that.

Ryan Greenwald -- Bank of America -- Analyst

Gotcha. Are you able to provide any color just in terms of like thinking about potential upside to capex in the EDI and beyond in terms of financing, in terms of cents on incremental dollars invested?

Brian B. Bird -- Chief Financial Officer

We got to have something to get you excited to meet with us in three weeks.

Ryan Greenwald -- Bank of America -- Analyst

Fair enough.

Brian B. Bird -- Chief Financial Officer

[Speech Overlap] travel to the meeting.

Ryan Greenwald -- Bank of America -- Analyst

In terms of the further acceleration of cost cuts this year, how would you frame O&M into '21 and timing of potential future rate cases, given the historical test here?

Brian B. Bird -- Chief Financial Officer

I would say, that's a -- we'll speak to kind of our thoughts on '21 in three weeks, too. But I have to tell you, the company continues to be extremely focused on cost control. Heading into this year, we did better than we anticipated to do and a lot of those things will continue into '21.

Ryan Greenwald -- Bank of America -- Analyst

Great. Appreciate the time.

Brian B. Bird -- Chief Financial Officer

Thanks, Ryan.

Operator

Thank you. We will take our next question from Shar of Guggenheim Partners.

Shar Pourreza -- Guggenheim partners. -- Analyst

Hey, Bob and Brian.

Brian B. Bird -- Chief Financial Officer

Hey.

Shar Pourreza -- Guggenheim partners. -- Analyst

How you doing?

Brian B. Bird -- Chief Financial Officer

Good.

Shar Pourreza -- Guggenheim partners. -- Analyst

Just a couple of quick questions here, just on the newly initiated, the earnings growth rate. Just curious sort of like how you frame the top end. You guys have talked about sort of being really comfortable with sort of that day spend run rate being around $400 million a year. So does that top end include sort of the backfilling of the current capex trajectory? And then, so how do we also think about Montana generation spend, which could obviously, as you've highlighted, reach $200 million? So is that sort of incremental to the 6% that you just initiated?

Brian B. Bird -- Chief Financial Officer

I would say this, and I -- again depends on how successful we are in RFPs. But I would put it in this context, if we're able to, as you point out, get timely recovery on a $400 million investment in each of those years, and I'm not saying that's exactly what it's going to be, but we should be more like in line with the middle of that range. I'm saying, if we're successful from an RFP perspective, we certainly should be at the top end of that range and it depends on how much investment there is. And the final recovery, is it possible to do better? I imagine it is. But I think we're comfortable with that 3% to 6%.

Shar Pourreza -- Guggenheim partners. -- Analyst

Got it. And then just -- can you just remind us just on the equity question? And obviously, we're waiting for it, but is -- where are you as far as the protected and unprotected added refunds? And under the assumption that you may see higher corporate taxes, can that mitigate sort of some of your incremental equity needs that were still waiting some disclosure on? So I guess, how do we sort of think about the interplay between potential higher corporate taxes and your equity needs and kind of where you are as far as the refunds of the added?

Brian B. Bird -- Chief Financial Officer

Obviously, as Bob pointed out, there is election going on and we all know that TCJA had a tremendous impact on companies from an equity perspective. We -- Shar, we have not contemplated anything from an election perspective into our plans. From an equity raise, we're looking at status quo at this point in time. I would expect again with timely recovery, much like we did timely recovery -- had timely recovery when we had to pay refunds to our customers. Obviously, an increase in the tax rate ultimately is going to be beneficial to us from a cash flow perspective. And so, well, we have to -- we'll also have that information around that February-April timetable on how to think about that as well.

Shar Pourreza -- Guggenheim partners. -- Analyst

Got it, got it. And then just lastly, with you joining EIM and we've seen some of the companies that have joined EIM, there's sort of a bill savings that you're getting as a result of it, right, the headroom, some of the utilities have been able to pull forward some capex, given sort of the balance sheet -- given sort of the bill headroom you've gotten as being part of EIM. Have you sort of quantified sort of what potential savings you could see as you join the EIM and if you have additional bill headroom as a result of EIM? Could you pull forward some additional spending opportunities similar to what we've seen with some of the other sort of members?

Robert C. Rowe -- President and Chief Executive Officer

No. That's not the way I would look at the Imbalance Market at least near term. Honestly, we have not used the phrase bill headroom in the context of either CAISO or SPP. In SPP, which is a complete market, we have seen substantial supply savings to our customers, but in order to get the full benefits of SPP, we have -- that has certainly been another factor supporting our retire-and-replace approach to our oldest assets in South Dakota. In terms of moving Montana into the EIM, we were later than some of the other Western companies. We sat on the eastern edge of the western interconnect because we needed to get comfortable that there was a positive return benefit for our customers for moving forward. As the western market developed, we could see that. But again in the EIM, it's a -- it's not a capacity market, it's a [Indecipherable] market and we need to have resources that dispatch in order to fully participate.

I think the longer-term benefits will depend on how that Western market evolves, but certainly we believe there will be savings and other benefits, as well from moving into EIM, but we don't anticipate anything that would look like a step change. And then you have to factor in other considerations moving in the opposite direction such as Brian was just discussing, a substantial change in central tax policy.

Shar Pourreza -- Guggenheim partners. -- Analyst

All right. Got it.

Brian B. Bird -- Chief Financial Officer

Bob, If I could, I think it's fair to say, as that market does develop and if it becomes a fully functioning market like SPP, I mean, we have seen the 6% to 7% improvement for customers' bills participating in that market. And I think that's ultimately where we'll get to, and I agree, Shar, that will provide headroom but Bob talked about -- there's a lot of reasons we want to participate in EIM. That ultimately would be one as well.

Robert C. Rowe -- President and Chief Executive Officer

[Speech Overlap] and much longer proposition, and as we looked at joining EIM, we very much wanted to be part of the longer-term development of that market.

Shar Pourreza -- Guggenheim partners. -- Analyst

Got it. Perfect, thank you guys. Appreciate it and congrats.

Operator

Thank you. And we will take our next question from Chris Ellinghaus of Siebert Williams.

Chris Ellinghaus -- Siebert Williams Shank -- Analyst

Hey, guys, how are you?

Brian B. Bird -- Chief Financial Officer

Hey, Chris.

Chris Ellinghaus -- Siebert Williams Shank -- Analyst

Brian, as far as the incremental estimate of bad debt expense from COVID-19, is that 100% deferred at this point?

Brian B. Bird -- Chief Financial Officer

No, no, no, no, it's -- we're booking that bad debt expense as we normally would. We did have a slight adjustment for South Dakota in the third quarter. But we're hopeful in the fourth quarter, pending again, on the accounting order to have an adjustment at that time once, again, we see the final order.

Chris Ellinghaus -- Siebert Williams Shank -- Analyst

Okay. That's what I want a clarity on. Okay. So in the fourth quarter, pending the order in a couple of weeks, that benefit can flow through in the fourth quarter. Correct?

Brian B. Bird -- Chief Financial Officer

Correct. And as I pointed out also, Chris, just earlier on, just to avoid confusion, we've mentioned $0.05 in the past and if you argue today it's $0.09. But again, we have been -- and certainly seen benefits of our AMI system in South Dakota. We've had ability from a disconnect for non-payment to capture some of that incremental bad debt. And we're also -- and currently right now doing the same in Montana, albeit without AMI, but we're seeing some progress there as well. So unfortunately we run into winter rules and so the ability to disconnect, and have the same impact slows here relatively soon. So we've got to continue to work hard at it to try to reduce that amount of bad debt expense as best we can, with or without an accounting.

Chris Ellinghaus -- Siebert Williams Shank -- Analyst

Right. Well, what I was kind of getting at is, just so that everybody has clarity, that fourth quarter range, which is a pretty substantive one, incorporates both weather and this potential for the accounting order to be a pretty sizable bounce back, right?

Brian B. Bird -- Chief Financial Officer

As I've said that we -- that is about a $0.05 item and we're expecting to get favorable regulatory treatment in our guidance.

Chris Ellinghaus -- Siebert Williams Shank -- Analyst

Just looking at the capex, I presume that the drop-off in the natural gas capex for years is merely just the imperfect forward estimates of capital and that's part of what we will hear about at EEI?

Brian B. Bird -- Chief Financial Officer

Yeah, I think it's -- go ahead, Bob.

Robert C. Rowe -- President and Chief Executive Officer

Nope, right after you. [Indecipherable]

Brian B. Bird -- Chief Financial Officer

Hold on. I just would say this, I think you know typically we have this downward sloping and sometimes things can change, priorities change as well as we move forward in terms of where that capital spend goes and we moved some things around to fit projects in, but that's all I have to say there.

Chris Ellinghaus -- Siebert Williams Shank -- Analyst

Okay. And...

Robert C. Rowe -- President and Chief Executive Officer

I would add just that we do have a robust gas investment program, both distribution and really particularly on the transmission side. And there is -- there certainly is fall off in the last couple of years, but the averages are still significant, of course, that's up a big -- it's not as big a part of the overall business, but we do have some significant gas transmission investments coming up and we visited with the Board about those even this week.

Chris Ellinghaus -- Siebert Williams Shank -- Analyst

Okay. All right. I appreciate it. Thanks to both. I appreciate it.

Operator

Thank you. And we now have Brian Russo of Sidoti.

Brian Russo -- Sidoti -- Analyst

Yeah. Hi, good afternoon.

Brian B. Bird -- Chief Financial Officer

Hey, Brian.

Brian Russo -- Sidoti -- Analyst

Hey, just -- a lot of my questions were asked and answered, but just on the timing of the RFP outcome. Is there a deadline for the winning bidders to be announced by the independent third party in the event that it's a self-build scenario to have that generation available in early '23?

Robert C. Rowe -- President and Chief Executive Officer

There isn't a deadline for the announcement. We've been -- as you know, we extended the open period for bid submissions but have been able to pull all of the rest of the date and we are very concerned to get supply available to meet our customers' needs. Just as you said, we are in the whole, not just in 2023, we are in the whole now, been in the whole for a number of years. And we're very concerned about our customers' increasing exposure. So we're comfortable with the first quarter timing based on what we've seen from across the wall. We think that'll be doable.

Brian Russo -- Sidoti -- Analyst

Okay, got it. So even early 2023 commercial availability, I mean even that's somewhat fully [indecipherable] right? It could be mid-2023 or is it time with maybe short term PPAs rolling off? Just a little insight there.

Robert C. Rowe -- President and Chief Executive Officer

Well, there's not a lot of insights to give. We need the capacity resources now and we think 2023 is realistic. And by just point of comparison, as you look across the border to the east, to South Dakota, you see how quickly we've been able to go from plan to execution to meet the needs in South Dakota and as important as those needs are, we're not facing a 45% capacity shortfall at our facility by any means. So we have a sense of urgency in Montana. And we think it would be appropriate for the state of Montana for urgency.

Brian Russo -- Sidoti -- Analyst

Okay, great. And just curious, how did the PCAM function in the third quarter of 2020 when you saw the volatility in the Western power markets in August? Just curious, were you above or below the baseline in rates?

Brian B. Bird -- Chief Financial Officer

Brian, we have a schedule in the back of our deck that kind of shows the PCAM impacts. And it's 36 of the deck and in there we show for the 2020 expense, it's about $400,000 to the detriment, if you will, and on a year-over-year basis, it's $500,000 variance.

Brian Russo -- Sidoti -- Analyst

Okay, got it. Thank you.

Operator

Thank you. We will take our next question from Jonathan Reeder of Wells Fargo.

Brian B. Bird -- Chief Financial Officer

Hey, Jonathan.

Jonathan Reeder -- Wells Fargo -- Analyst

Hey, Bob and Brian. How are you all?

Brian B. Bird -- Chief Financial Officer

Good.

Jonathan Reeder -- Wells Fargo -- Analyst

Just wanted to go quickly back to Montana and the COVID-related expense recovery and the final [Technical Issues]. I thought in that work session. [Technical Issues] are some sort of like 5% net income threshold before any sort of recovery would be afforded. Is that not the way, I guess, you've interpreted things or have they changed that opinion? Can you just kind of update there?

Robert C. Rowe -- President and Chief Executive Officer

That's really what we are waiting to see in the order.

Brian B. Bird -- Chief Financial Officer

That's -- Bob, that's what I was going to share.

Jonathan Reeder -- Wells Fargo -- Analyst

Right. But if that 5% net income threshold is withheld or upheld in the quarter, then presumably you won't get that $0.05 recovery, right?

Brian B. Bird -- Chief Financial Officer

If in fact there is a restraint, if you will, and depending on how that restraint is worded, it could have an impact on us recording a Reg asset. That's correct. And it also depends on how that would be applied. Is that impact just on bad debt or is that all impacts associated with COVID, Jonathan, there's a lot of unknowns yet and we need to see in that final order.

Jonathan Reeder -- Wells Fargo -- Analyst

Okay. No, I thought there were still some uncertainty there, but yeah, I misinterpreted Bob's comments that it sounds like everything was really positive. So I just wanted to check to make sure that was still there. And then going back also...

Robert C. Rowe -- President and Chief Executive Officer

The discussion at the Commission was extremely positive. And there was just some noise around that particular issue. So we're eager to see the order.

Jonathan Reeder -- Wells Fargo -- Analyst

Okay. And then back to the Colstrip and the Washington Commissions suspending their [Technical Issues]. What was kind of the rationale behind that? I missed yesterday with some other merger activity going on.

Robert C. Rowe -- President and Chief Executive Officer

Really? What was going on yesterday? Tell us about that.

Jonathan Reeder -- Wells Fargo -- Analyst

Do you want an M&A related question as a follow-up, though?

Robert C. Rowe -- President and Chief Executive Officer

No, no, no, no. I shouldn't have opened that particular can. Yeah. most of you were probably following this, but in sequence, we've talked about, Talen asserting its willful for Talen looked at the deal and said gee, NorthWestern negotiated a very good deal for its customers and for the state, we want half of that. Then in Washington, first, the commission staff, which appears as authority, filed some testimony critical of the proposal in a number of ways, including saying that the deal was too favorable to NorthWestern and then another party also filed testimony that it was problematic, In fact that was Avista. So based on that, then the PSC requested that the schedule be postponed. The Washington Commission approved that, and there will be now a scheduling conference set on the or a status conference set on the 30th.

We were certainly disappointed that Avista chose to participate in the way that it did. I honestly don't know why they did that. And we believe that the transaction would provide real benefits all around. And obviously Puget, which is a very sophisticated company, concluded that it was an important part of its strategy to, on the one hand, meet the Washington State's carbon deadline in 2025, while meeting its customers' needs between now and then. We believe that it helped fill that hole we've been discussing on this call for our customers, for a significant period of time. We also believe, it really gave the state of Montana, the opportunity to have meaningful control over this part of it's critical infrastructure and provided benefits to the community in Colstrip. So again, big picture, we think the proposal that Puget and we negotiated did an awful lot of very important things. But the status will likely be determined in front of the Washington Commission and we will all know more in the coming weeks.

Jonathan Reeder -- Wells Fargo -- Analyst

Okay. So at this point you think -- I mean, getting the Washington approval is obviously key and without that, there is no way for you to move forward in any form or fashion on Colstrip. And I guess you'll just address the shortfall again through successive RFPs?

Robert C. Rowe -- President and Chief Executive Officer

Yeah, we'll have to make that decision depending on what happens in Washington. But you're right. For this deal to go forward, there has to be an approval in Montana, of course, but there has to be an approval in Washington for the sale of the regulated assets. And depending on how that all comes out, we will make an evaluation. But at this point, we were counting on the 92 megawatts to help meet our customers' needs. We believe there was value in the PPA back to Puget, it would have had the net dedicated toward future remediation costs for our existing ownership share with Puget retaining the responsibility for what they currently own. So again, there's just a lot of very, very attractive pieces to all of this for both parties. And I really believe that if it doesn't go forward, it will be a big loss all around. In fact, really a big loss for the Colstrip owners that aren't direct participants in the transaction. But we'll have to evaluate what we do next, once we get some clarity.

Jonathan Reeder -- Wells Fargo -- Analyst

No, I appreciate that clarity and response and look forward to speaking with you at EEI. Thank you.

Operator

Thank you. [Operator Instructions] You have a follow-up question from Michael Weinstein of Credit Suisse.

Michael Weinstein -- Credit Suisse -- Analyst

Hi, I was going to ask a lot of the same questions about Colstrip. But can Unit -- I mean, maybe as a -- just a follow-up to it, can Unit 3 operate on its own if Unit 4 -- if the sale of Unit 4 doesn't go through and eventually you wind up having to shut Unit 4, let's say? Can unit 3 operate on its own? Is it -- is there enough current up there to...

Robert C. Rowe -- President and Chief Executive Officer

Yeah. More probably the scenario would be the opposite. There is an onerous operating agreement that covers both Units and there is a reciprocal sharing agreement between the two Units. But yes, the two Units can operate independently. And our existing ownership interest is in Unit 4. What we were proposing to purchase is in Unit 4. We don't own any of Unit 3.

Michael Weinstein -- Credit Suisse -- Analyst

I'm just thinking about, I don't know, maybe you make a comment on the broader region and what is -- what does supply look like across the entire Pacific Northwest over the next few years? I mean, at what point do you wind up with load overcoming supply, nothing else getting built going forward. When do you wind up [Speech Overlap].

Robert C. Rowe -- President and Chief Executive Officer

That is exactly the reason that we are so bullish on the Northwest Power Pool regional resource adequacy work. We are, as a region, facing those concerns. If you do a kind of a ranking of the reserves available to all of the companies that operate in the Pacific Northwest, everybody is a little bit scared and maybe getting a little bit naked. But we are incredibly, incredibly exposed and we need dispatchable resources to meet peak, we need resources to help integrate and balance the intermittent resources that continue to come on in very large number. And that, unfortunately, is not what's being built, but that is what is being retired.

Another kind of an interesting point of comparison is the California outages this summer. And if Travis could include in future appendix, a pretty good comparison of the resources in CAISO to the resources on our system, and effectively these are rough numbers, but you could say California has probably right now providing a 50% dispatchable resources primarily including natural gas and a relatively -- surprisingly relatively lower percentage of intermittents and renewables, whereas we have a very, very high percentage of intermittents and non-dispatchable resources and a very, very low percentage of dispatchable resource. And, of course, in Montana, we haven't brought any new thermal resources on in about a decade. So for all those reasons, yeah, this is a concern for the Western United States, it is a concern for the Pacific Northwest and it is a bigger concern, by far, for Montana than for any other state in the list.

Michael Weinstein -- Credit Suisse -- Analyst

And yet, this is not an election issue, right? I mean, it's not even being talked about in the legislative contests as [Technical Issues]

Robert C. Rowe -- President and Chief Executive Officer

There is awareness. There is increased awareness. It's a tough thing to get your arms around. There are certainly political leaders who understand it and want to help address it, but it's a tough issue and long term decisions are very, very hard to make. I understand that, too. That's what electric and gas companies do, make long term decisions, but we can't do that if we don't have support from politicians and policymakers.

Michael Weinstein -- Credit Suisse -- Analyst

And just to be clear, you guys are not affected by any of the wildfires yet. Hopefully, never, but not really affecting your system at all. Right?

Robert C. Rowe -- President and Chief Executive Officer

No, we have fires virtually every year. And we have certainly the beetle infestations, things like that, but if you go back to when we started our distribution system infrastructure plan over a decade ago, we've always put substantial resources in the vegetation management. Now we have a very aggressive hazard tree program, we are participating with the other Western utilities in what you could call kind of a gap analysis, sharing our various strategies, deciding what strategies that other electric companies in the West are using that might make sense for us, and what strategies don't, but -- and then doing some of those things. So we do have fire exposure. We are focused on it, have been for a very long time. We did have fires this year, not on the scale, by any means, of what has happened on the Coast. Our largest fire this year was just north of Bozeman in a -- just a very beautiful area. It's in North and East of Bozeman. And then we have other smaller fires as well, certainly.

Michael Weinstein -- Credit Suisse -- Analyst

But not enough to raise any alarms either at the legislature or the Commission. You can point to California and what can happen, right? [Speech Overlap]

Robert C. Rowe -- President and Chief Executive Officer

We have been briefing the Montana Commission on this subject for quite a few years, and they do understand it and they do support the expenditures that we are making from the vegetation management side to the investments that we're making in the system. I'm going to get a little bit more detailed for you. One of the things that we're doing, just because our planners have so much data, is what we call the Electric Segment Identification Program, or ESIP and what we're doing is taking the data to identify sub-segments in these very, very long lines we have in much of Montana, and then being able to target our work at those line subsegments and effectively rebuild those as capital projects, by the way. But we use our resources as efficiently as possible. There are benefits in terms of fire preparedness or avoidance, but also real benefits in terms of reliability and resilience.

Michael Weinstein -- Credit Suisse -- Analyst

All right, thanks, Bob.

Robert C. Rowe -- President and Chief Executive Officer

More than you wanted, but thank you for listening.

Michael Weinstein -- Credit Suisse -- Analyst

Oh, no. Not at all. Not at all. Thank you, Brian.

Brian B. Bird -- Chief Financial Officer

Hey, thanks. One thing you should point out, Bob, to be clear. We didn't start those fires. Those fires just happened to happen in Montana. Correct? Just want to make sure that's clear.

Robert C. Rowe -- President and Chief Executive Officer

Thank you.

Operator

[Operator Instruction] Speakers, at this time we have no further questions.

Robert C. Rowe -- President and Chief Executive Officer

Brian, I think you and I talked them into submission, mainly me.

Brian B. Bird -- Chief Financial Officer

That's right. Get out that snow shovel out, Bob.

Robert C. Rowe -- President and Chief Executive Officer

Thank you very much for joining us. It is too bad that we're not going to be together in person at the EEI meeting, but I'm sure it's still going to be a great, great conference. Have a great weekend.

Operator

[Operator Closing Remarks]

Duration: 67 minutes

Call participants:

Travis Meyer -- Director of Corporate Finance and Investor Relations Officer

Robert C. Rowe -- President and Chief Executive Officer

Brian B. Bird -- Chief Financial Officer

Michael Weinstein -- Credit Suisse -- Analyst

Ryan Greenwald -- Bank of America -- Analyst

Shar Pourreza -- Guggenheim partners. -- Analyst

Chris Ellinghaus -- Siebert Williams Shank -- Analyst

Brian Russo -- Sidoti -- Analyst

Jonathan Reeder -- Wells Fargo -- Analyst

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