NorthWestern Energy Group, Inc. Q2 FY2021 Earnings Call

Good afternoon and thank you for joining NorthWestern Corporation’s Financial Results Webcast for the Second Quarter of 2021. My name is Travis Meyer. I am the Director of Corporate Finance and Investor Relations Officer for NorthWestern. Joining us today to walk you through the results and to provide an overall update are Bob Rowe, our Chief Executive Officer; Brian Bird, President and Chief Operating Officer; Crystal Lail, Vice President and Chief Financial Officer. We also have other members of the management team on the line with us to address questions as appropriate. NorthWestern’s results have been released and the release is available on our website at northwesternenergy.com. We also released our 10-Q pre-market this morning. Please note that the company’s press release, this presentation, comments by presenters and responses to your questions may contain forward-looking statements. As such, I will direct you to our disclosures contained in our SEC filings and the Safe Harbor provisions included on the second slide of this presentation. Please also note this presentation includes non-GAAP financial measures. Please see the non-GAAP disclosures, definitions and reconciliations also included in this presentation today. The webcast is being recorded. The archived replay of today’s webcast will be available for 1 year beginning at 6:00 p.m. Eastern today and can be found on our website at northwesternenergy.com under the Our Company, Investor Relations, Presentations and Webcast link. With that, I will hand the presentation over to NorthWestern’s CEO, Bob Rowe.

Thank you, Travis. I have just finished a very good Board meeting. This was our first Board meeting together in a year and a half, also the first meeting chaired by our new Board Chair, Dana Dykhouse, CEO of First Premier Bank. We have gotten a lot of work done in the system. So far this year, I am sure we’ll come back and talk about some of that. Yesterday, we hit a new peak in our Montana balancing authority of over 1,909 megawatts. The balancing authority, of course, includes load in addition to our retail load. But what was significant was that required over 1,000 megawatts of import. It was a hot day in July, where our system was heavily dependent on imports. We have seen the same pattern in February, with very cold temperatures. So, it’s just a reminder of the importance of our infrastructure and also again, our critical exposure to the regional capacity market and the importance of our plans to address that. To summarize, net income for the second quarter increased $15.7 million as compared to the same period last year. Diluted EPS increased $0.29 as compared to the same period last year. After adjusting for weather differences and a non-cash liability, non-GAAP adjusted earnings per share increased $0.14 as compared to the same period last year. The Board declared a quarterly dividend of $0.62 per share payable on September 30 to shareholders of record as of September 15. In April, we entered into an equity distribution agreement having an aggregate gross sales price of up to $200 million. During the three months ending June 30, we issued 879,309 shares of common stock at an average price of $64.91 for net proceeds of $56.3 million. In June, after 2.5 years of very hard work, we joined the Western Energy Imbalance market and this real-time within our energy market will provide our Montana customers economically efficient energy to resolve imbalances and variations in load and generation. It was a tremendous lift, made even more challenging by COVID. We heard from CAISO, the market administrator, that it was one of the smoothest entries that they have seen and again, a lot of credit to our leadership and the team doing the work. We look forward to realizing those benefits for our customers going forward. With that, I’ll turn it over to Crystal Lail.

Thank you, Bob. And as Bob mentioned, it is rather nice to sit in a room with my colleagues again and do meetings in-person and begin to feel like we are resuming back to normal in some regards. With that, I will take you to Slide 4 with the P&L. As Bob mentioned, net income of $37.2 million as compared with $21.5 million last year in Q2 or a $15.7 million increase or 73%. Really a solid quarter in line with our expectations on a GAAP basis and driven by improved gross margin offset by a bit of higher operating cost. With regard to gross margin on Slide 5, gross margin of $230.3 million as compared with $208.3 million of the prior period, an increase of $22 million or 10.6%. When you look at the amount of that gross margin change that falls to the bottom line, that’s approximately $20.2 million. First, regarding the transmission piece, there is really two parts in that $9.1 million increase. That includes the release of a deferral of interim rates on our transmission rates related to the ultimate resolution through a compliance filing with the MPSC. I will remind you all that our wholesale rates ultimately become a credit on our Montana retail side. The remainder of that increase in electric transmission is really driven by conditions in the market in the second quarter here with both the combination of higher loads and rates, influenced by warm and dry weather both to the south and west of us. The second piece here is the electric QF liability adjustment. This is something we typically adjust every year in Q2 and can be a bit noisy. Hence, as we did pull a piece out of this as a non-GAAP adjustment. The net-net of those two pieces is approximately $2.6 million of unfavorable impact, which offset the non-GAAP portion that we pulled out of $8.7 million, which was a revision to an estimate based on clarification of contract terms and as we don’t expect that to recur, that’s reflected as a non-GAAP item. As usual, there is a page in the exhibit that will give you more information on that and a clear breakout that I probably just covered verbally for you. But again, $6.1 million on a GAAP basis contribution to margin for the quarter. I can see on is electric retail volumes and we did experience overall warmer spring weather, and certainly a piece of that is driven by customer growth, at 5.6%. With that, our residential usage and impact were about flat and commercial was an improvement over the prior year. As we think about the second quarter of last year, it reflects certainly the lowest usage and most COVID impact that we saw comparatively, so certainly a rebound from that. We continue to see what would be higher residential loads than normal, but not quite as high as they were in Q2 of 2020. We also continue to see lower commercial and industrial usage, but again, those are better than last year. So, a bit of a move in the trend, but the trend continues to be there of a shift in use per customer. I will discuss that further when we talk about guidance for the rest of the year later. With that, I will turn to weather on Slide 6. Weather, you will see that April and May were a little bit cooler, made up for with warmer weather in June. I will highlight a couple of things. One, the second quarter is always a bit of a shoulder quarter for us. Secondly, you will see some pretty big percentages on the cooling degree days of 153% warmer and 66% warmer. The relatively small amount of ultimate cooling degree days there indicates the ultimate impact, and mostly again, June was a favorable weather impact of $2 million as we think about normal conditions and $1.5 million compared to the same period in Q2 of 2020. As always, I will address that a little more when we talk our GAAP to non-GAAP adjustment. Slide 7 gets into operating expenses. Operating, general, and administrative expenses were $77.1 million in the quarter as compared with $71.7 million in the prior period or an increase of $5.4 million or 7.5%. The amount that falls to the bottom line is approximately $3.2 million of that variance. There are a couple of things driving that: one, an increase of about $2 million related to generation maintenance at our electric facilities; in addition, about $1 million related to employee benefits, that’s primarily driven by an increase in medical costs; and then also a $0.9 million increase related to the implementation of technology and the associated maintenance cost with that as well. The thing I would note of those increases is a bit of an offset in our uncollectible accounts. We are seeing the ultimate collections from our customers come back in that regard and that offset those increases by approximately $2.8 million. The other thing that I would note here is that we do expect headwinds in the back half of the year driving toward a more sustainable and normal amount of costs on an ongoing basis. From a property tax perspective, we are about flat to the prior year, a $0.3 million increase and then depreciation a $2 million increase driven primarily on plant additions. With that, Slide 8, operating income of $59.1 million as compared with $44.8 million in the prior period, or $14.3 million, a 31.9% increase, again, driven primarily at the gross margin line. Interest expense and other income are immediately below that, showing a favorable net adjustment. There was a decrease in interest expense and an increase in other income, both of which are driven by the debt and equity portions of AFUDC for a favorable impact on those, quarter-over-quarter. From an income tax perspective, I would highlight that we have income tax expense in the current period as compared to the benefit in the prior year, or prior period that’s driven primarily by higher pre-tax income, partially offset by higher flow-through deductions. From a cash flow basis, you will see on Slide 9, our cash flows for the six months ended in 2021 compared to 2020, you will see a decrease of $114.7 million. Most of that decrease occurred in Q1 and we talked about that then. But I will reiterate a couple of things: an $82.8 million increase in market purchases of supply. Again, most of that was experienced in Q1 that we do continue to see higher overall market prices of electricity out there, but most of that was a Q1 impact. In addition, we had a refund to our FERC customers of approximately $20.5 million and that has impacted cash flows as well during the period. Slide 10, I will walk you through and just remind you of what we just discussed from a non-GAAP adjustment perspective, one weather impact, you will see the $2 million we discussed as compared to normal with a $0.5 million in the prior period, so, net-net over the period $1.5 million. In addition, we talked about our QF liability adjustment and that we pulled out the piece of that, that we don’t expect to recur, which is a clarification of contract terms of approximately $8.7 million favorable adjustment there. With that, reducing GAAP net income to $29.2 million for the quarter or $0.56 as compared with $21.1 million in the prior quarter or $0.42 on a non-GAAP basis. Slide 11 provides our earnings guidance for the year. The quarter for us was in line with our expectations. One of the things that we had talked about before when we announced our guidance was that we had a bit wider range of $0.20, which was $3.40 to $3.60. With the quarter here and our performance so far, halfway through the year, we have narrowed that to a $0.15 range of $3.43 to $3.58. We have also updated a couple of assumptions that I would mention as key to how we think about the back half of the year. And there is still a lot of year left to go. But one of the things is we are continuing to see the pattern from a usage perspective of commercial industrial volumes being off from what we would consider normal and residential offsetting that a bit. We do expect that to continue in the back half of the year. The other thing that I mentioned is, again, while we have had a strong first half of the year, we do expect operating costs in the back part of the year to increase, which would reflect a more sustainable level. We expect those pressures in the back part of the year as well. The other thing I certainly would highlight is that we have updated the diluted shares outstanding to approximately 51.8 million to 52 million. To increase that, it was previously 51.5 million to 51.8 million. The other thing that we’ve noted is that increased share counts update the reflection that we expect to issue the full $200 million of equity that we had indicated a need for previously, which adjusts that timing sooner than we had initially indicated. The thing I would comment on is that in response to the need to support the growth we are experiencing from a company’s basis and also to support and maintain our credit ratings. I would also remind you that we are on track for the $450 million of CapEx spend in ‘22, which compares to approximately $400 million in ‘21. I should say ‘21 compares to more of a $300 million number from before that. The thing I would indicate regarding the amount of equity we expect to do this year is again in support of our credit ratings, but also the growth we have in front of us as a company.

Thank you. I will point out that the year is the only number you have got wrong since you have been the CFO. So, Crystal and Travis and all finance department continue to do great work. Touching lightly on some of the regulatory matters, we don’t expect to file a general rate case in any of our three jurisdictions this year, which is still 2021, but we have made several other important regulatory filings in our Montana jurisdiction. In April, we filed a request to delay implementing our fixed cost recovery mechanism pilot, that’s the Montana version of decoupling for another year until at least July of 2022 due to the continued uncertainties created by COVID. On June 29, the Montana Commission granted that delay. We have not seen a written order; we are of course eager to see that. We appreciate the workload of the Commission, so that was very much a positive. Also in April, we filed a request to prove an increase to the forward costs used in developing rates for the recovery of our electric power costs in Montana through the power cost and credit adjustment mechanism, our friend, PCCAM, that would be approximately $17 million. This is intended to better align the base costs in the PCCAM with the costs that our supply team is facing in the market on behalf of our customers. On June 29, the Commission approved implementing interim rates reflecting the $17 million increase, which is of course subject to refund. There again a written order is pending. In May, we filed a request to approve acquiring electric capacity resources important to address our customers’ exposure at peak to the regional power market. This was based on the 2020 RFP that we’ve been discussing with you for quite some time. Brian will come back and discuss that in much more detail. Finally, we have been able to wrap up the FERC rate case parallel to follow on to our last Montana General Electric rate case. We are pleased to have reached a settlement refunds and have implemented the new rate structure, which we think will be a benefit all around. Crystal is doing a great job in her new role. Meanwhile, Brian has transitioned. He has replaced the consonant with a vowel in his title. I will set up the capital plan briefly and then turn it over to Brian. We always share this slide with you and we have a robust capital plan looking out 4, 5 years into the future. As Crystal mentioned, we are on track to meet our capital plans for this year, involving over $2 billion of total investment over the 5-year period, financed with a combination of cash flows from operations, mortgage bonds, and equity issuances. During the second quarter, as you know, we initiated the $200 million ATM program. We expect to issue the remainder this year to support our current capital program and protect our credit ratings. Capital investment in response to the Montana RFP and the supply resource investments would be incremental to these amounts. Of course, finance plans are subject to change depending on CapEx regulatory outcomes, internal cash generation, and market conditions. The South Dakota resource investment is well underway about $100 million, included in the 2021 through ‘23 periods, and we expect this capital should result in annualized rate base growth of 4% to 5%. Again, the project does not include the investments necessary to support the rural generating station if approved by the Commission, that should be an additional $250 million excluding AFUDC, spread primarily over 2022 to 2023. In his new role as COO, Brian has been spending time across all 3 states, making the rest of us jealous, doing a great job working with our executive team and management in the operations area to enhance cooperation. We are poised to continue investing in and delivering our customers the highest possible level of service. So, off to you.

Thanks, Bob. As Bob mentioned, on the capital slide, we had a tremendous amount of investment in all areas of the operation and are extremely busy at this higher level of capital spend. We anticipate with Laurel coming online we will ultimately make that investment to continue these high levels of capital investment. On Slide 14, speaking to the generation portfolio in Montana, remember back in May, we made our filing associated with acquiring electric capacity through resources identified in our January 2020 RFP. From that, two of those entrances, if you will, the Laurel generation station and the esVolta energy storage contract we included in that filing; Laurel being the 175 megawatt RICE units located in Laurel, Montana. We intend to invest $250 million and it is expected to be in commercial operation in late 2023 or early 2024. Then there is a 50-megawatt battery facility from esVolta to be located near Billings, entering through a 20-year agreement to fill the 5-hour duration tier identified in the RFP. Not included in that filing but should be included in our PCCAM is the Powerex transaction, a 5-year power purchase agreement for 100 megawatts of capacity. Earlier this week, the MPSC concluded that the application met the minimum filing requirements, starting the shot clock for 270 days. We hope certainly to get an outcome near the end of this year and hopefully if we can get going on this project. Moving over to South Dakota, our project on the Bob Glanzer Generating Station is going along extremely well and we expect to have it online by the end of this year. Additionally, we plan to move forward with Aberdeen and as Bob mentioned, the South Dakota capital is included in our capital plans, but we expect to have the Aberdeen unit also online by the end of 2023, much like the Laurel Generating Station.

We really took the first half of this year to go after those things from an ESG perspective that we haven’t had appropriately disclosed. We worked extremely hard to tie that to the release of a brand new webpage coming online within days. When that happens, it will be much easier for investors and those folks from an ESG perspective to find information, updated information. The effort captures this information and records it. As a result, we will provide new reporting from an SAS B perspective, from a TCFD, will have an AGA ESG Methane Reporting Template, all of those are being updated. We will have our EEI ESG Carbon Reporting Template revised and expanded. We are really excited for two reasons. The webpage is going to look great, and you will see a very large focus on ESG. From our perspective, it’s going to be very easy for those rating us to capture that information and depict our scores moving forward.

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

Thanks, Bob. Please make sure to press the icon that shows all fingers pointing up.

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

Sure. Ryan, I think a couple of things. One, the first half of the year is in line with our expectations for where we expect to be performing. The other thing we updated is we do expect a bit of headwinds in the back part of the year with continued load trends, as I alluded to, from a customer usage perspective of seeing lower commercial and industrial usage, while admittedly better than the prior year, still not back to what we would call normal, but partly by improved residential usage, but again, not quite as good as it was last year. So, that’s certainly a piece of it. The other headwinds I alluded to is on the operating side. We have provided that walk for where we expect operating expenses to be from a full-year basis.

Got it. And then was the transmission deferral expected?

Yes.

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

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

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

Okay. You are ahead of us on technical execution there. I think your comment has been will be roughly 50:50. As we get closer to that, obviously, proceeding with the approval docket, we will have more to come on that.

Hey, good afternoon. Can you guys hear me okay?

Yes. We sure can.

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

I guess, so Jonathan, I would answer your question in a couple of parts. One, the sense of the additional equity, as we had talked about coming out of Q1, we were on a negative outlook from Moody’s perspective. So we are mindful of where we are going for a credit rating perspective. The other key factor is the amount of CapEx and investment in the system at this point. Those are the bigger pieces of it. From a guidance perspective, I think we have talked to a bit about our performance through the first half of the year being in line with our expectations.

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

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

$165 million. Okay, great. Thanks so much for taking my questions. Appreciate it.

Yes. Hi, good afternoon.

Hi, Brian.

Hey, can you elaborate on the dynamics of the transmission margins outside of the interim rate? You mentioned hot and dry weather in the south and west of you, I would imagine that’s continued into July? Does your guidance capture the transmission revenue potential upside above normal in July?

I guess a couple of things I would say about that is obviously the conditions related that drive, there is long-term firm transmission and there is the short-term market. That short-term market is more of what’s driven on a day-to-day basis, which can vary more. Certainly, we have moved into a formula rate environment. So, we have captured that in our expectation for the rest of the year. But the thing I would just highlight at a high level perspective is we have continued to highlight where we have margin headwinds, there may be puts and takes in there. From a guidance perspective, being narrowed in that range, we expect to perform well in the back half of the year. Again, transmission is good news if that continues.

Great. So, in essence, third-parties are utilizing your transmission to wheel power to the west where demand is needed?

Yes.

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

Well, in fairness, you are absolutely right. If you did the math, I am focused on 270. The extra 90 days, of course, puts us a full year. I was an eternal optimist, Brian. There is always an opportunity; they could be done by the end of the year. But you’re right, if you actually do the shot clock in 270, you will be around the end of the first quarter.

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

I think the best thing to say at this point in time is, like you said, you are absolutely right, let’s get Laurel approved and move forward, and I think we will assess at that point in time our needs and size accordingly.

Can you hear me?

Sure, can. Can you hear us? Andy?

Yes, yes. Okay, so hello, everybody.

Hi, Andy.

A couple of questions. So, the first one is just on load specifically commercial and my guess to a lesser degree industrial, but again, we’ve only had a couple of samples this quarter from the company’s reported results on the earlier side. We have seen quite a recovery in commercial loads in other parts of the country. Could you kind of just talk about that? And why, again, I understand you said they have recovered, but it seems going slower than others, since some are at like pre-pandemic levels. How much incremental load would it take to get back to pre-pandemic levels on the commercial and industrial side?

Yes. I think the thing I would just highlight there, Andy, is a couple of things. One, we did see improvement in commercial loads, certainly as you look at compared to the prior period, but not back to what we would term normal. If you look at the detail in either the appendix of the investor deck or in our materials, you would see that we are continuing to trend under what would be if you think back to 2019 levels. Certainly some improvement, and I think its context, I won’t give commentary, but I don’t think it’s the prior year was shutdown-related. This year, I think if I had to weigh in, it’s more workforce issue related and other factors in the economy; so different drivers. Again, we are seeing improvement there, but not what we would call normal. On the residential side, you haven’t heard from many utilities, but we continue to see strong residential usage, but not as strong as prior year. The thing that I think is indicative is that you see flat residential revenues, even though we had a warmer quarter in certain ways. We will continue to monitor from a guidance perspective, with the back half of the year, there is still quite a bit of uncertainty as to where those trends will move.

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

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

If you had to net it all out longer term, if you got back to more commercial, like some investors have said, a more like pre-pandemic load. Residential properties can always be a little bit stronger than what it was pre-pandemic. Did that mean a neutral earnings outlook relative to that? Would there be upside, but you got to add back to a more normal situation?

I guess I would answer it this way: we will see where, and I hate the term 'new normal,' but we will see where the new normal is. The other thing I would remind you of is we have solid customer growth in our service territory. Just from a customer account perspective, we are seeing good indicators there and solid economies, so all those things are certainly favorable indicators.

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

Yes. That’s fair. When will that RFP be signed?

Yes. RFP is sometime in 2022, as Brian mentioned earlier, the expectation that you would basically have an outcome on Laurel, that’s probably at the earliest mid-2022. Thank you, Crystal. Thank you, Brian. We are ready for questions.

Thanks, Bob. Please remember to click the icon that has all the fingers pointing up.

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

I will take my first crack at it. I think for a couple of regards: as you think about our CapEx plan here in 2021, I think a lot of those costs are already baked in. Where I would expect you would consider inflation is more in the out years of ‘22, ‘23. If trends continue, whether they are short-term or long-term, time will tell.

All I would add is that inflation is certainly a concern going forward. We have to increase operating costs, potentially, and capital investment. We are also running into some supply chain issues. We have done a nice job of managing that thus far. We are having great success to share. We wanted to expand our implementation of AMI in Montana, it was going so well. However, due to supply chain concerns, we are going to have to keep to our original schedule. Otherwise, things are going pretty well, but we are keeping our eyes out for concerns around inflation and supply chain.

Got it. The other one just kind of wildfire activity. I know there has been some in Montana. Anything that we should be aware of that’s not impacting or concerned, and maybe just remind us how any incremental costs associated with either wildfire mitigation or I guess, recovering from them works?

What I would say is we have been very active planning for wildfires and other events for several years. We participate in a lot of good regional analysis but have developed our own strategy including hazard tree clearance, which are danger trees outside the right of way down to a sophisticated program to identify line segments that need particular investment because of their nature. That’s a capital item, not an expense item. We can talk to you about it for two hours but just a couple of weeks ago, we had a great two-hour meeting with the Montana Commission, giving them a good presentation on what our fire team within asset management is doing. We also spent good time at the Board of Directors this meeting talking about the program. The Montana Commission did give us support specifically for hazard trees in the last general rate case, and I think we are seeing the benefits of all that work during this dry year. There is always more that we can do just in terms of maintenance of the system. The foresight of our distribution and transmission folks is really paying off.

Yes. Bob mentioned earlier that we had a peak load as of yesterday. There are fires in Montana and you are reading about it in the paper. They impact our system; we manage that and continue to provide that service with very little interruption to our customers. It just speaks to the quality of our operations at this company. I get reminded at least by the T&D folks, we have been dealing with forest fires for over 100 years.

Okay. We will take our next call from Matt Davis at Coann Capital. Matt, your line is open. Matt, if you are not unmuted, you’ll need to unmute your line.

Hey, guys. Can you hear me?

Sure, we can.

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

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

Hello.

Yes.

Can you guys hear me?

We can now, yes.

Just made this now on transmission. There are a lot of conversations happening in the West about transmission planning, especially as it relates to California load, but others as well. Is there a room for you to maybe add transmission into that thinking process?

We are indeed and have always been very deeply involved in all of the Western discussions around transmission. Most of those are relatively informal because this is not an organized market. Many of the most structured discussions around transmission come in the context of regional resource adequacy work led by the Northwest power pool. As we look at how we are going to meet our Montana retail customers' needs, we are very aware of the constraints on our transmission system in terms of being able to import power, which is why it’s important to have generation in our balancing authority.

Yes. Bob, you are right. We are very concerned about both electric and gas transmission constraints. There is an opportunity for us to invest in increasing transmission on gas or electric. We are more than happy to do that to access markets outside of Montana. In the meantime, we are also going to focus on what we can do within Montana from both electric and gas perspectives to ensure we have supply and can meet our needs within Montana. That’s an opportunity to protect our customers daily, particularly during peaks and also for us presents a great opportunity for investment.

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

I will take my first crack at it. I think for a couple of regards: as you think about our CapEx plan here in 2021, many of those costs are already baked in where I would expect you to consider inflation in the out years of ‘22, ‘23. If trends continue, whether they are short-term or long-term, time will tell. If so, then certainly your cost will reflect the same work we would expect to ultimately impact us and customer build.

And all I would add is that inflation is certainly a concern going forward. Obviously, we have to plan for increased operating costs and potentially capital investment, and we are running into supply chain issues. We have done a nice job of managing that thus far. We are having great success to share. We wanted to expand our implementation of AMI in Montana; it was going so well. But due to supply chain concerns, we are going to keep to our original schedule. Otherwise, things are going pretty well; but we are keeping our eyes out for concerns around inflation and supply chain.

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

As I said before, we have been very active planning for wildfires for years. We have good regional analysis and our strategy by way of hazard tree clearance is preventive. Just a couple of weeks ago, we met with the Montana Commission, sharing our fire team's good works. We also spent good time with the Board talking about the program. The commission has supported hazard tree clearance in our last rate case. All the planning we continue pays off for us in dry years. More always needs to be done, but the performance of our teams is yielding results.

That’s right. Bob noted the recent peak load. There are fires in Montana, but we are managing just fine, maintaining service levels with little interruption to our customers. It’s a testament to our operations' quality; our team’s long experience with forest fire management gives us an edge.

Okay. We will take our next call from the line that ends in 0231. The line should be open. Remember star 6 to unmute your line.

Can you guys hear me?

Yes, we can.

Yes, yes. Okay, thank you.

Okay, great. Thank you. With that, it looks like your queue is exhausted. Before I hand it back to Bob though, I would invite everybody over to the pool party at Andy’s house. So, I like the phone over there. Bob?

You left me speechless, and it’s really hard to do, but it’s a great visual image. I wish we were all at Andy’s pool. Enjoy the rest of your summer. I look forward to seeing you in person over the rest of the year. Take care, everybody.