Earnings Call Transcript - NWE Q4 2020

Travis Meyer, Director of Corporate Finance and Investor Relations

Good afternoon, and thank you for joining NorthWestern Corporation's financial results webcast for the year ending December 31, 2020. My name is Travis Meyer, and I'm the Director of Corporate Finance and Investor Relations for NorthWestern Energy. Today, I am joined by Bob Rowe, President and Chief Executive Officer, and Brian Bird, Chief Financial Officer, who will guide you through the results. As you may know, this week we announced several key leadership changes, and we have incoming CFO Crystal Lail, currently the Vice President and Chief Accounting Officer for NorthWestern, with us today. Crystal has been with NorthWestern for over 18 years and has been instrumental in shaping the company into what it is today. Brian is passing on significant responsibilities, but those of us familiar with Crystal are confident she will excel in this role. I want to clarify that this comment highlights our exceptional talent rather than her average shoe size. Please note that NorthWestern's results have been released and are available on our website at northwesternenergy.com. We also released our 10-K earlier this morning. Please be aware that this company’s press release, this presentation, comments by presenters, and responses to your questions may include forward-looking statements, so I direct you to the disclosures in our SEC filings and the safe harbor provisions on the second slide of this presentation. Additionally, this presentation includes non-GAAP financial measures, and you can find the relevant disclosures, definitions, and reconciliations in the materials. This webcast is being recorded, and the archived replay will be available for one year starting at 6:00 p.m. Eastern today on our website under the Our Company, Investor Relations, Presentations and Webcast link. Now, I will turn the presentation over to NorthWestern CEO, Bob Rowe.

Robert Rowe, President and Chief Executive Officer

Thank you very much, Travis. Thank you all for joining us. I hope wherever you are, it's warmer than it is here in South Dakota or Montana, where we've been experiencing temperatures well below zero and are currently in a prolonged cold spell. But it's February, so that's to be expected. I want to start by thanking and congratulating both Brian and Crystal. Brian and I have been working together for quite some time; he even shared a fact with me about our combined tenure being 30 years, while the industry average for a CFO and CEO is about 8 years. Crystal and I will be starting fresh as we reset the clock. As you already know, Brian is a fantastic leader of the company, and many of you are familiar with Crystal, who will do an excellent job. Brian is moving into a new, crucial position that we haven't had before. I see these changes, along with others, as a sign of a healthy company that engages in effective succession planning and cares about its people, just like we do with our infrastructure. The entire Executive team and the Board are very excited about this change. Crystal, as a piece of advice, when Brian hands you that pair of Keds, be sure to handle them carefully and wash them before even thinking about wearing them. Now, let's go over the highlights. Net income for 2020 was $155.2 million, which is nearly $47 million or 23% less than the same period in 2019. Diluted EPS was $3.06, down $0.92 or 23% from 2019. However, non-GAAP adjusted EPS was $3.35, which is within our guidance range of $3.30 to $3.45 and is $0.07 or 2% lower than in 2019. The Board of Directors declared a quarterly dividend of $0.62 per share, marking a 3.3% increase, payable on March 31 to shareholders of record as of March 15. I am very proud that despite COVID and the various challenges we faced while working in new ways last year, we achieved our best safety record ever during our busiest year for capital investments. We've discussed our capital plans every quarter, and we had a successful year reinvesting in our systems safely while prioritizing the health of our employees. Our recordable incident rate decreased from 1.86 in 2019 to just 1.36 in 2020. Similarly, our lost time rate fell from 0.58 in 2019 to 0.39 in 2020. This improvement means that more people are able to complete more work and return home safely every day. We take great pride in that. Customer satisfaction was also excellent, as our customers recognized and appreciated the contributions of our employees and the company to the community. We have been discussing the competitive solicitation process in Montana for quite some time and are currently reviewing the independent administrators' analysis. We expect to announce the selection of multiple projects in the first quarter. We anticipate that at least one of our projects will be among those selected, leading to more than $200 million in owned capacity generation investment in Montana over the next three years, pending approval from the Montana Public Service Commission. We will provide more details on this soon. Now, Brian, it’s your turn for the victory lap.

Brian Bird, Chief Financial Officer

Thanks, Bob. I wish it wasn't a COVID year for my victory lap. But with that, Bob talked about the financial outcomes in 2020, and net income was down on a GAAP basis, down $46.9 million or approximately 23%. You can look to that approximately $47 million negative variance all in the gross margin line. Up at the top of Page 4, you see gross margins down about $47 million or 5%. And when you think below on the P&L, we did a nice job in terms of managing expenses. As a matter of fact, operating expenses are down, combined with favorable AFUDC in the other income line were offset pretty much entirely by increased interest expense and a lower tax benefit in 2020. So we had a lot to do to overcome a difficult gross margin year. And on Page 5, we speak to that gross margin down to $47 million, as I mentioned, about 5%. That was pretty consistent, down 5%, both for electric and gas. And as we described to the bottom of that page, I break it down into five buckets, if you will. Electric and gas were certainly impacted by unfavorable weather. Secondly, I'd say COVID impacted that. Those two, of course, were partly offset by customer growth. We also had a poor outcome on our disallowance on our PCCAM, that's approximately $9 million. The first two I talked about were approximately $22 million in total. Below that, I really love together the three things. We had a QF gain in 2020, but it was lower than the prior year. We had a decent supply cost recovery primarily as a result of dealing with the debt ban. So on a year-over-year basis, that was a negative item. And then we had lower transmission revenues this year primarily from units 1 and 2 being down this year. Those three things combined together for approximately $9 million. Lastly, we had a big other here. As we've mentioned on previous calls, we had some favorable items in other in '19 and unfavorable in '20. These are primarily dealing with closed-out trackers. But on a year-over-year basis, that was a $9 million swing. The total of all of those things is approximately $48.5 million. We did get $1 million back, I guess, in terms of gross margin when you net it out, those items that impact gross margin that are offset elsewhere in the P&L for a net decrease in gross margin of $47.4 million. Weather on Page 6 was a big driver. We estimate overall unfavorable weather in 2020 resulted in $9.8 million pretax detriment as compared to normal and a $17.1 million detriment as compared to 2019. And when you look at heating degree days, for instance, at the top of the page, it was certainly warmer than normal. And again, compared to the historic average and quite a bit warmer than last year. We did get some help from a cooling degree day, primarily in South Dakota, but that’s a smaller part of our business. So we didn't get as much bang for our buck, if you will, in the third quarter for that. Lastly, on this page. In the first quarter and the fourth quarter, we like to see a lot of blue. Unfortunately, in 2020, we saw a lot of red or orange color, if you will. It's much, much warmer. Just to give you a bit of hint for 2021, you're going to see quite a bit of orange, I think, in January, and you're going to see quite a bit of blue in February. So far, February has been very, very cold, as Bob pointed out earlier on the call. Moving forward, on Page 7, in terms of operating expenses, this company, and we talked about this on earlier calls. Whatever we did see in a shortfall in margin, we would be managing our expenses to make sure that we did hit our revised guidance and did a nice job. Operating expenses were down $6.8 million or down 1%. The biggest driver was a reduction in OG&A over $20 million or down 6.6%, and we saw about a 4% increase in property taxes and depreciation and depletion. On the OG&A, the biggest driver is employee benefits, think medical, but a good portion of that were certainly lower incentives for the company during 2020. Had lower labor costs of about $4 million. Think of just Bob talked about, our biggest year from a capital investment standpoint, certainly allocating more labor to capital. Hazard tree removal, we did such a great job in '19 really getting after that. We had less dollars in 2020. And as you know, just less travel and other costs that you'd expect to see during a COVID year. We certainly took advantage of that as well. One area where we did see increased cost was on the uncollectible accounts. Even though we did get COVID relief, if you will, from the South Dakota Commission, we did not from the Montana Commission, and that cost us a $3 million increase in that particular item. Net-net, the change was down $22.7 million in OG&A for those items impacting net income. Again, we had some things that impact OG&A but are offset elsewhere in the P&L. Those totaled $1.6 million for, again, a net decrease in OG&A of $21.1 million. Mentioned the increases in property taxes and depreciation. Obviously, plant additions are the biggest driver there and on property taxes, changes in property valuations as well. Moving forward to Slide 8, operating income decreased by $40.7 million, approximately 15%. Interest expenses rose slightly due to higher borrowings. Other income increased mainly from a rise in AFUDC, largely due to the build-out in South Dakota from a generation perspective. This results in a pretax decline of about $38 million or nearly 21%. Additionally, we experienced a lower tax benefit compared to the previous year, which I will discuss shortly. As mentioned earlier, net income dropped by $46.9 million. Now, moving on to taxes on Slide 9, at the bottom of the page, the income tax benefit in 2020 was $11 million, down from $19.9 million in 2019, representing a reduction in benefit of $8.9 million. The primary reason for this is highlighted midway up the page, where in 2019, there was a release of an unrecognized tax benefit of $22.8 million. This was partially offset by three factors: lower pretax income leading to reduced federal income taxes, which amounted to $8 million; a decrease in state income taxes to $2.7 million; and an increase in capital work that qualified for tax repairs by $4.1 million, which helped mitigate last year's significant benefit, resulting in a net reduction of $8.9 million. Moving on to the balance sheet. I think all I'd say, I really focus on the capitalization really at the bottom of the page. We're definitely up in short-term and long-term debt. In 2020, we did delay equity needs that we had in 2020, and we'll talk about that on kind of 2021 moving forward. As a result of that delay, really, our debt-to-cap did go up from 52% up to 53.5%, but still certainly within our targeted range of 50% to 55%. Moving on to the cash flow statement on Page 11. Cash flow from operations are up about $55 million. That's primarily due to better supply collections this year. And then also in 2019, you may recall, we had TCJA refunds. We also had some generation interconnection refunds. That big improvement, that was over $100 million. Those three changes, that's reduced by the reduction in net income we talked about earlier, resulting in a net increase, if you will, in cash from operating activities about $55 million. Bob talked about a big year from cash and investing activities. You can see that approximately a $90 million increase there and just higher investment. We expect it to be at this higher level of investment and hopefully even higher when we speak to generation in '21. And then at the bottom of the page, cash provided by financing activity, certainly, higher debt was a driver there. Moving on to Page 12, there is a slide about taxes. I want to highlight that we are utilizing our NOLs and anticipate those NOLs will extend into 2021. However, due to PTCs and various tax credits we possess, we do not expect to be a cash taxpayer until 2024. Additionally, as mentioned elsewhere, we foresee our effective tax rate hovering around 0%, within a range of minus 2.5% to plus 2.5% on pretax income. Over time, we expect this effective tax rate to gradually rise until we reach 2025, targeting a range of 10% to 12%. Transitioning to adjusted non-GAAP earnings on Slide 13, I should first explain the items we excluded from our non-GAAP adjustments. We accounted for unfavorable weather this year and reinstated the PCCAM disallowance. In the results for 2019, we had excluded favorable weather and the unrecognized tax benefit. Consequently, in 2020, our diluted EPS of $3.06 increased by $0.29 to reach $3.35. When compared to $3.42, this involved adjusting the 2019 GAAP figure of $3.98 for the aforementioned items, which brought it down to $3.42. The difference between $3.35 and $3.42 is $0.07, indicating a 2% decline year-over-year on a non-GAAP basis. If you look at how we compare those non-GAAP items through the P&L itself, gross margin at the top of the page, down about $21 million and you look at it on a non-GAAP basis, I think half of that really being COVID. You could also see, from an OG&A perspective, we offset that gross margin detriment with a reduction of 22.8, but we certainly couldn't do enough to cover the increase in property taxes and depreciation. We did manage to do a good job in terms of increasing other income and a decent tax benefit, again, when you look on a non-GAAP basis year-over-year. But net-net, we got back to still falling short about $3.9 million or, again, a 2% detriment on a year-over-year basis. Slide 14, in terms of forecasting load itself, we did all right on the residential side, but we're still seeing commercial and industrial lag a bit. Those seem like quite a bit of difference from a volumetric perspective. I'll grant that to you. But if you move on to the next page, Page 15, and focus on the impact of the fourth quarter from a COVID perspective, it was rather flat for us. We saw a similar detriment in gross margin than we saw in the second and third quarters, in the fourth quarter. But the recovery that we did see in uncollectible accounts, we were able to collect from customers for a period of time before we entered into winter rules and, again, continued reduction in labor and travel and others. Net-net, that really just kind of flattened out to really a minimal loss or effective, I’d just say, 0, for the fourth quarter. But for the full year basis, we did see a total of $8 million to $11 million detriment in gross margin. Total operating expenses were down 2.4%. But in that number was, again, an increase in uncollectible accounts that had we got an accounting order, we would have actually reduced that to 0 as well. But even with that as a backdrop, a little bit different interest expense and better taxes just to calculate what we would have seen on a GAAP basis. After tax, we saw a loss about, I would argue, $5 million to $7 million or $0.09 to $0.14 associated with COVID. Back to the $3 million uncollectible accounts. I think we have been saying all along, if we didn't get an accounting order from the Montana Commission, it would be about $0.05. That $3 million is approximately $0.05. Instead of being at the bottom half of our earnings guidance and our revised guidance, we would have been in the top half, if we had been able to achieve that. Last thing I'd say, Bob referenced this upfront. When you consider a lot of concerns about COVID and how it could impact our capital spend and impact our supply chain, the company operated extremely well. Bob mentioned safety, but to deliver the biggest capital spend we had and really pull that off this year, it gives us a lot of confidence going into 2021 with even an increased level of capital spend. So I feel good about the operations of the company at this point in time. Moving on to Slide 16. The 2020 non-GAAP to the 2021 EPS bridge starts with $3.35. We estimate a range of $3.40 to $3.60, which is quite broad. While we would like to narrow that down, we need to monitor the COVID situation in 2021. It's important to note that there is a significant increase in gross margin from $0.39 to $0.54. This growth can be categorized into three segments. One-third is from organic growth, the second third is from a partial recovery related to COVID, especially in the commercial, industrial, and transmission sectors. The final third relates to property tax recoveries, with anticipated increases in property taxes expected to positively impact our margins. Additionally, there was a negative effect on other categories in 2020, which we do not expect to see in 2021, contributing to the last one-third alongside the property tax trackers. Our 2021 guidance assumptions are outlined at the bottom of the page, including expectations for normal weather and that COVID will continue to affect us through the second quarter, leading to a more normalized environment in the latter half of the year. Our consolidated income tax rate is projected to range from minus 2.5 to positive 2.5, with diluted average shares expected to be between 51.5 and 51.8. I want to focus on that last one for a second. I think there's maybe been some concerns about announcing a $200 million 3-year ATM program. Obviously, going from our share count where we sit today to this range, we’re not planning on issuing $200 million of equity in 2021. That is a 3-year look. I'd also remind folks that we did not issue equity in 2020, and we had discussions with the rating agencies in light of where our price was, and we have seen some rebound in our price. We expect to be issuing equity in 2021, and some of that is rolled over from 2020 and some, of course, with our needs. But I want to reiterate, the $200 million is over a 3-year period. Last thing I'd just say on equity, and I know Bob will see it in the slide here and coming up as well, if, in fact, we're fortunate enough to win in the RFP and make an investment there after a pre-approval, we're going to need to raise equity for that as well. Anything associated with that Montana generation is not built into our numbers, our capital or our equity and debt needs at this point in time. So with that, I'll go to my last slide. We have diluted EPS at the top of the page. Even with a reduction in GAAP and non-GAAP earnings in 2020, the average growth rate over this time period was 4.3%. The midpoint of our 2021 guidance compared to our year-end 2020 non-GAAP shows a 4.5% increase, which aligns with the average we've seen during this period. Regarding the dividend, the projected $0.08 increase for the full year represents a 3.3% increase. While this is notably less than the 6.7% average growth rate, we expect to grow the dividend in line with our earnings growth rate moving forward. Additionally, we expect to see a 4% to 5% growth in rate base and a 3% to 6% EPS growth over the long term. At this higher level of capital spending, as we recover that investment through rates, we anticipate seeing ourselves in the middle of that range. If we achieve success in the Montana RFP, we expect to be at the high end of that range upon getting recovery or preapproval as we make those investments. Lastly, we aim to maintain a 60% to 70% dividend payout, which is a significant factor in the lower dividend increase compared to the past but still reflects a strong dividend, up $0.08. We intend to stay within that payout range as we continue to grow the company’s earnings. And with that, I'll hand it back over to Bob.

Robert Rowe, President and Chief Executive Officer

I picture, Brian, dropping the mic right there. Brian, it's been great working with you as CFO over these last 12.5 years or so, and I'm looking forward very much to working with you as COO. Just to show you how seriously Brian is taking his new role, he's now driving a large pickup truck appropriate to his new position. As you get to know Crystal, you will find out that she is much more inclined towards jeeps and classic pickup trucks than she is towards those exotic German sports cars that most CFOs drive. I think the last quarter, I talked about how much we were all looking forward to 2021 in terms of the opportunities ahead of us. I would say that speaking for myself, but I think really for the whole Executive team and the Board, we are more enthusiastic and optimistic about our ability to do good work for our customers than has been the case in quite some time. This is reflected, among other things, in the amount of capital work that we have planned for this year. We told you in our last call that our total capital forecast for five years is $2.1 billion. As Brian mentioned, we expect to finance this with a combination of cash from operations, first mortgage bonds, equity issuances through a 3-year, as Brian said, ATM program. Financing, obviously, is subject to change, depending on capital expenditures, regulatory outcomes, internal cash generation and other factors. The plan that we depict does include significant and important generation projects in South Dakota. As we've talked about there, we were really able to move from filing our plan to consulting with the commission to making the investments very efficiently. We have a project underway at Aberdeen and even further along here on, but the capital forecast here is really spread across all aspects of our business. Just as an example, we successfully commenced operation of our AMI system in South Dakota. This week, we had a great kickoff of the AMI team in Montana. That's going to be a substantial investment and operational opportunity over the next 3.5 or so years. Again, we're looking forward to moving ahead on that. The 5-year plan does not include incremental generation in Montana that might come out of the RFP. We do have ongoing investments in the hydro system as we continue to optimize that great asset for Montana. To press rewind for a minute on the Montana RFP, last February, going into COVID, we did undertake a competitive solicitation for up to 280 megawatts. The solicitation was in three tiers: long duration, 20 hours; intermediate, 10; and short, 5 bids were pivoted on behalf of a wide variety of generating facilities in excess of 200 megawatts. We do expect that at least one of our projects will be among those selected, and that should result in additional own generation capacity in excess of an additional $200 million. Again, that is not included in the plan. That would be an investment over a three-year period, assuming we do receive approval from the Montana Commission through the statutory preapproval process that's available in Montana. Again, we've continued on cost-effective upgrades to the hydro facility, including generator rewinds, turbine upgrades, and other improvements. It was impressive that a lot of that work was able to go forward during the COVID year as well. We intend to enter into the Western Energy Imbalance Market this spring. There were challenges certainly around recruiting and training during COVID, but we do expect that we're quite confident that we'll be able to move ahead this year on that project in spring, I should say. There will be advantages in terms of efficient operation and lower costs. We've talked before about how we had a very good experience seeing real customer benefits moving into SPP out of South Dakota. Now this EIM, obviously, is not a full market. We don't expect to see benefits of that magnitude, but we are looking forward to seeing real benefits there. In South Dakota, we have made significant progress on the 60-megawatt project in Heron, which involves the rice units. We anticipate that this project will be online by late 2021. It has been a smooth experience and involves an investment of about $80 million, with $40 million allocated for 2020 and the remainder for the following years. This investment is included in the capital budget I previously mentioned. Additionally, we are also advancing plans for an extra 30 to 40 megawatts of flexible generation in Aberdeen, expected to be operational in 2023, with an estimated cost of around $60 million. These investments in South Dakota are either planned or already underway and are incorporated into the capital budget. Other regulatory items, to provide a bit of an update. As you recall, the Montana Commission did approve a fixed cost recovery mechanism, a.k.a decoupling, originally to take effect in July of 2020. Because of COVID and the asymmetric patterns we were seeing between customer classes, we asked the commission to delay that until July of this year, and the commission agreed. We expect the FCRM to take effect next summer. At the same time, we were wrapping up our Montana rate case successfully, we did file a FERC transmission rate case, and real thanks to everyone who worked on that through all series of settlement meetings, most of which had to be conducted online because of COVID. We reached a settlement agreement that was filed in November. As of end of December, we did have cumulative deferred revenues of about $31 million, and the refunds have been executed on that. We refunded about $20 million to our wholesale and choice customers in January. We expect to submit a compliance filing with the Montana PSC adjusting for credit in our retail rates upon receipt of a final order. Notable out of the FERC case, we're moving to a modified forward test year, and there will be a much better harmonization between prices and costs recovered in Montana and recovered at the federal level, which will address a potential gap that we saw earlier. Finally, in this category, each year, of course, we submit tracker requests for recovery of purchased power, particularly our purchased power in natural gas and then also property taxes in Montana. The commissions review these. Often, they are relatively straightforward filings. In Montana, unfortunately, in October, the commission voted to disallow $9.4 million in purchased power costs over the prior period. We've issued refunds associated with that also in January of this year. We have, as we've discussed on previous calls, we are extremely concerned about the implications of that order and do not agree with it. But it is for a past period, and we're certainly looking forward to working with the new commission going forward. We have been focusing significantly on ESG initiatives. Brian leads our internal ESG committee, and everyone on this call actively contributes to it. We believe we have an impressive story regarding our efforts in this area. Among our key initiatives, we have created a new landing page that consolidates all existing ESG information. This includes disclosures from 2019, as well as some new and existing policies and standards related to optimal ESG practices. We have also added a new sustainability statistics report that provides a five-year trend of our operational and financial ESG data. We encourage you to visit the link on the webpage at the bottom of your screen. We really do continue to make very good progress, most notably, the substantial improvement you'll see in the MSCI rating from BB to an A. A couple of other notable things here, along with the investment in system-wide electric vehicle charging, and we've got good projects underway in South Dakota. We're hopeful in Montana as well. We've also committed to a thoughtful transition in our own fleet starting in 2021. Initially, we'll be targeting about 30% of light-duty and bucket trucks and 20% of medium and heavy-duty to be electrified by 2030. So again, in summary, a great year despite the challenges from an operational, safety, customer satisfaction perspective in '20 and laid the foundation, we believe, for a particularly good year in 2021. And with that, we'll take your questions.

Travis Meyer, Director of Corporate Finance and Investor Relations

Thank you, Bob. We'll take our first question from Andrew Levi.

Andrew Levi, Analyst

I have a couple of things. Firstly, I just have to say, it's Friday and a long weekend, and it's 4:10. So you guys remind me of Hawaiian Electric if that's a joke between portfolio management.

Robert Rowe, President and Chief Executive Officer

We don't get Monday off, shame on us.

Andrew Levi, Analyst

Okay. You might want to reconsider your stance regarding the Board meeting and related matters. That's my concern. I really don't have anything to do with the schemes. However, I have a couple of thoughts for you. First, at a high level, regarding COVID and your guidance, how much have you factored in the negative effects of COVID in your 2021 guidance?

Robert Rowe, President and Chief Executive Officer

Ongoing COVID, yes. Brian, are you ready for that one?

Brian Bird, Chief Financial Officer

Yes. I would just say this, Andy. We kind of backed off our thoughts for the first half of the year, expect to see COVID linger really through the first two quarters. The first quarter certainly is a big quarter for us; our lightest quarter, typically. So we do expect by the summertime, things are going to be in a much better spot. So that's our expectations.

Andrew Levi, Analyst

No, I understand that, but I'm just saying like financially. I guess how much of a...

Brian Bird, Chief Financial Officer

Financially, that's how we're looking at margin. That's how we're looking at expenses.

Andrew Levi, Analyst

But is it like $10 million? I'm just trying to figure out like if you were in a more normalized environment, let's say, 12 months from now, what would we be adding back?

Brian Bird, Chief Financial Officer

Maybe one thing would be helpful, Andy, is we did give quite a bit of detail, if you will, for quarters two through four this year in terms of how it impacted our P&L. If there's an expectation, we're going to see some of that impact us for certainly the first half of this year. That's how I think about it. And then obviously, if COVID's not here and think about organic growth on top of that, that's how things should start unwinding, if you will, out of COVID.

Andrew Levi, Analyst

Okay. And then on the IRP process, where you talk about potentially $200-plus million that you feel very comfortable with. So I get that part. Can you just talk about the part that is kind of unknown at this point, and if there is the possibility for more than that stated CapEx?

Robert Rowe, President and Chief Executive Officer

What I would say is that in the current RFP, we're actively involved right now in finalizing what we'll take forward to the commission, and we're comfortable that we will have a project as part of that, that will take us over the $200 million threshold. That takes down a part of our customers' exposure to the market, but we didn't include it in this deck. Our customers in Montana are over 45% exposed to the regional market. We expect that there will be a subsequent RFP. We haven't made decisions about timing, but this is real stuff. This isn't just a policy debate. A little bit about how the system is operating today. Fortunately, we own gas transmission and storage as well as electric transmission and generation. Our folks are doing a fantastic job coordinating with one another, but we are on the market, and we don't want to be on the market nearly as much as we are. It's a price risk, and it's even a supply risk. This is something that can happen in Montana, pretty much any time of the winter, but it can also happen in August. We're very pleased to be moving ahead with the RFP right now, but we do expect we're going to be going out relatively soon, over the next several years, with a subsequent RFP to continue to take down our customers' exposure to a market that you just really do not want to be in.

Andrew Levi, Analyst

Okay, I understand. So I interpreted it as you having a lease for either one or two projects through the RFP, but there are still uncertainties regarding this RFP. However, you are referring to future RFPs where there could be additional opportunities. I understand that.

Robert Rowe, President and Chief Executive Officer

Yes, we believe there is potential for growth in the current situation, but the upcoming RFP will also be very important.

Andrew Levi, Analyst

I understand. And then, I guess, I don't know if I want to say whether this RFP or future RFPs, what are you guys thinking as far as solar/storage as an opportunity and whether that makes sense within your service territory as a way to get some of the shortfall?

Robert Rowe, President and Chief Executive Officer

Yes, there are guidelines in place. One of the reasons for structuring the RFP with options for 5 hours, 10 hours, and 20 hours was to allow different types of resources to participate, which has indeed happened. If you want to explore this further, I recommend looking at a filing that our supply planner made with the Montana Commission in December. It contains a detailed discussion on various types of resources and their effective load-carrying capacity contributions, and honestly, it's one of the best things I read last year. There is a viable opportunity, but we need to be realistic about what that opportunity is. Right now, our Montana system is approaching 70% carbon-free, with about 450 megawatts of wind currently in place. Unfortunately, the production is quite low at the moment, especially when we need it the most. It's a lengthy response, but I believe that's the most effective way to consider it. I strongly encourage you to check out the December supply supplement.

Brian Bird, Chief Financial Officer

Bob, I'd like to just add one thing, too. Obviously, we wanted to participate in this RFP for builds that are going to take place in the 2022-2023 time period. There will be, as Bob pointed out earlier in the call, another RFP maybe late this year or early next year, and that would be for builds in the '24-'25 time period. We’d like to think we're going to have an opportunity to participate in that as well. Just want to make sure that people understand there are really going to be two of these coming.

Robert Rowe, President and Chief Executive Officer

If you look at the 5-year capital forecast and think about how any kind of future project might be layered in there, I think that's quite positive as well.

Andrew Levi, Analyst

Okay. And then this question's for Brian. I should have said at the beginning, congratulations, Brian.

Brian Bird, Chief Financial Officer

Thanks, Andy.

Andrew Levi, Analyst

Very proud of you. You're almost there. You're almost in the Executive suite. We're actually here in the Executive suite, but the CEO office. You're almost there. So let's see. As far as the financing plan, it's very straightforward, okay? So I understand it. The one thing I just don't really understand, though, is why are you doing an ATM versus just issuing. Because look, you give us your shares outstanding. So it looks like you need about $75 million of equity this year, give or take, right, which is like 1.3 million shares? Why not just issue it to us? Because your stock traded 271,000 shares today. In general, and that was all on the close really by like 3:00, and it traded like 160,000 shares. It's going to take you like all year, I'm exaggerating, to do it. Whether it's me or some other people like me, we could easily take down your shares at a small discount, and then you wouldn't have this affecting the performance of the stock because, truly, I believe it can because the stock unfortunately trades so thinly, like a lot of utilities at the current moment because of the way the market is.

Brian Bird, Chief Financial Officer

Well, I appreciate your view, Andy. I would tell you this, we've had great success with ATM in the past. In fact, we have quite a bit of build, as you know, both from the generation side in South Dakota and our current plan in terms of capital needs. I would tell you this, that the ATM, like I said, served us well. We're bullish on our share price that it's going to be going up over this time period. Another reason we like what we're doing here. But I'd also tell you nothing precludes us from doing anything else. If something better comes along, it makes sense for us to issue shares, we could possibly do that as well. But right now, the plan is to—over a three-year period is to raise that $200 million to meet our current needs.

Andrew Levi, Analyst

And just to understand, through your ATM, I mean, I guess from what you're saying is if someone wanted to come and make a bid, I guess, for no better way to put it, I don't know that's not the right term, if you take down a small block of your stock, I guess that could be part of the ATM as well.

Brian Bird, Chief Financial Officer

I'm just saying we have flexibility to either use the ATM or something else, if something else better comes along.

Travis Meyer, Director of Corporate Finance and Investor Relations

We'll take the next question from Michael Weinstein at Credit Suisse.

Michael Weinstein, Analyst

So to follow up on Andy's questions, in terms of what you're thinking about rate cases in Montana going forward, considering 2020 as a test year, I guess, if you were going to do it this year? And 2020 is a funny year, right? So I don't know if that's really—yes, I'm just wondering what your timing is looking like. I think, normally, you provide an update in April, right? But...

Robert Rowe, President and Chief Executive Officer

Yes, I can confidently say that we will file a rate case in Montana this year. Our focus will be on the preapproval filing related to the implementation of the supply plan.

Michael Weinstein, Analyst

Right. So that would be the primary focus of this year will be the preapproval. That's going to take most of the year?

Robert Rowe, President and Chief Executive Officer

I think realistically, once they determine the filing to be sufficient, they're on basically a nine-month shot clock.

Michael Weinstein, Analyst

I wanted to ask about the disallowance on Colstrip. Is the $9.4 million final at this point? It seems like this has been in progress for a couple of years.

Robert Rowe, President and Chief Executive Officer

It is final. Yes.

Michael Weinstein, Analyst

Is there a reason why Montana concluded that you didn't deserve recovery of that? The explanation you provided seemed quite reasonable. It's not your fault.

Robert Rowe, President and Chief Executive Officer

We certainly thought so, and Crystal was one of the key witnesses in that proceeding. There were basically two questions. One had to do with whether the outage associated with taking the plant down partially for environmental compliance was in some way imprudent when we went to the market to procure replacement power; and then, secondly, the timing of elimination of the deadband under a statute that was passed. We were very concerned, disappointed, and strongly disagreed with what the commission decided. But it is now a past period, and we're not appealing. We are, on the other hand, really focused on working with the new commissioners, the new tariff, the commission to continue to improve things.

Michael Weinstein, Analyst

In fact, regarding that topic, the new commission structure appears to offer some potential for enhancement in terms of regulatory treatment moving forward. Do you have any thoughts on what the new priorities may look like? In the past, there has always been a focus on ensuring that jobs are preserved in the state. Has that perspective shifted at all, in your opinion?

Robert Rowe, President and Chief Executive Officer

I want to first comment on the commission. We have a strong relationship with the South Dakota Commission that has allowed us to invest efficiently in serving our customers in Montana, and we aim to cultivate a similar relationship with the commissioners, their staff, and ultimately, the consumer council. Most decisions from the commission that impact us are influenced by advocacy from the consumer council. I am very impressed with the two new commissioners and believe they will be valuable additions to the returning commissioners. Chairman Brown, who is a lawyer with a graduate degree in tax, is dedicating significant effort to effectively managing the commission and its processes, which is crucial. Meanwhile, our legal and regulatory teams are collaborating with their counterparts at the commission, which is a positive development. We have held several productive informational meetings, and despite the challenges posed by COVID-19, we had a meaningful overview of our company with the two new commissioners back in December. In January, our supply leaders made an excellent presentation to the full commission addressing the peak deficit, exposure to the regional market, and our expectations from the RFP. The commissioners were very engaged and understand the concerns we raised, showing commitment to tackling them in the coming weeks. We will provide an overview of our financial operations soon. I believe that state commissioners need to concentrate on operations and finance to succeed in their roles, as their decisions affect our work. Overall, I am very optimistic about these developments. Additionally, in Montana, for the first time in many years, there is a political alignment among the governor, the legislature, and the commission. Governor Gianforte is a successful entrepreneur who founded a software company sold to Oracle, which continues to invest in Montana. It’s important to note that his success would not have been possible if his company faced the same challenges we have experienced. He is dedicated to investing in the state's essential infrastructure and ensuring the viability of Colstrip as a key asset for its operational lifespan. The Republican majority in the legislature has increased and they work closely with the governor. We believe that the two new commissioners will be strong contributors to the commission going forward.

Michael Weinstein, Analyst

Yes. It's striking to me that the write-off for purchase power costs due to the outage at Colstrip illustrates the issues with relying on the western market for purchases. This seems inconsistent with the common belief in the state regarding utility ownership of generation. I'm curious if this perspective is shifting moving forward.

Robert Rowe, President and Chief Executive Officer

I would say that there is a greater appreciation of the value of owned generation as part of the portfolio. For perspective, we own less of our generation than many companies, particularly in the non-organized market. We discussed how much more exposed we are to the regional market at peak times compared to our peers. Again, looking outside, it's beautiful, but it is snowing and it's below zero. I would feel much more comfortable if we had control of more of our own resources to serve our customers.

Michael Weinstein, Analyst

Makes sense. Congratulations, Brian and Crystal.

Brian Bird, Chief Financial Officer

Thanks, Mike.

Travis Meyer, Director of Corporate Finance and Investor Relations

We'll take our next call from Jonathan Reeder of Wells Fargo.

Jonathan Reeder, Analyst

Can you hear me now?

Travis Meyer, Director of Corporate Finance and Investor Relations

Yes. Sure can, Jonathan.

Jonathan Reeder, Analyst

You were kind of almost getting into it, I thought, with the last color there, Bob. But what are your thoughts on some of the bills that have been introduced in Montana this year? I think there's one that we get rid of the preapproval process while another would expedite the time that the MPSC has to authorize preapproval. Where do you think those head this year? How does that impact the current RFP and the future RFP plans?

Robert Rowe, President and Chief Executive Officer

Yes. To be straightforward, I believe that the bills backed by the majority are more likely to advance than those backed by the minority. The bill that clarifies the current preapproval process is also more likely to progress. I think the bill to eliminate preapproval has either been or soon will be shelved, which is the right move. There are several other bills we are monitoring, including some that were previously passed but unfortunately vetoed. The preapproval repeal bill has already been set aside, and we feel optimistic about that. I see potential opportunities this legislative session that will enable us to better serve our customers, which is very important.

Jonathan Reeder, Analyst

That's interesting to make the comment about ones that have passed but then or vetoed. Are there any that fall in that bucket that we should be particularly aware of? I'm trying to think back to past legislative sessions what they might have been...

Robert Rowe, President and Chief Executive Officer

Two that come to mind immediately. One of the legislature prohibited subsidies in that metering. It didn't prohibit the metering. It simply prohibited cross subsidies from one group of customers to another. Unfortunately, the previous governor vetoed that bill. I'm certainly hoping that there will be progress to make net metering a fair and sustainable program, something that we can support and, in fact, make available to our customers without harming other customers. The second bill that was approved in the previous session and vetoed was the community renewable energy portfolio standard. We found that to be really unworkable. The challenge is projects to qualify as preps have to be both below a certain size and meet the cost threshold to serve our customers. It's very, very difficult to meet both thresholds. So it's been a big distraction for us. We have managed to get most of the way to our requirement, but we certainly believe that modifying or eliminating that requirement would be a substantial step forward.

Jonathan Reeder, Analyst

Okay. And then the only other question I had was on the Montana decoupling pilot that goes into effect in mid-'21. Remind us, will we see the true-up to normal flow through the P&L in the second half of 2021? Or does it not occur until the end of the 12-month period?

Crystal Lail, Chief Financial Officer

Thanks, Jon, throwing one my way. Yes, the FCRM, we expect at this point still to implement that pilot beginning in July, and we will report that. You'll see it in our earnings on a quarterly basis.

Travis Meyer, Director of Corporate Finance and Investor Relations

We'll take our next call from the line of Ryan Greenwald at Bank of America.

Ryan Greenwald, Analyst

Can you hear me?

Travis Meyer, Director of Corporate Finance and Investor Relations

We sure can.

Ryan Greenwald, Analyst

Congratulations to both Brian and Crystal.

Brian Bird, Chief Financial Officer

Thank you, sir.

Ryan Greenwald, Analyst

So assuming you guys are successful with some of the generation projects in Montana and you guys get the preapproval, how would you kind of frame equity needs on the dollar of additional spend from here?

Robert Rowe, President and Chief Executive Officer

Brian?

Brian Bird, Chief Financial Officer

Yes. I'll grab that one. I think I would just assume for practical purposes, it's a 50-50 capital structure associated with that.

Ryan Greenwald, Analyst

Got it. Lastly, considering the differences in valuation across the sector and your current trading position, how are you approaching any potential strategic considerations from this point onward?

Robert Rowe, President and Chief Executive Officer

That was an artful way to put the question. What I would say is we are really focused on the opportunities right in front of us. Brian, do you want to take that one this time?

Brian Bird, Chief Financial Officer

I'll grab this one, Bob. I think from my perspective, we certainly think we are undervalued. We're certainly not three turns worse than our peer average, as some people have us today. The best thing we can do is increase the value of our company, and that creates strategic opportunities down the road, and we’d be better positioned either way in a stronger position. Our share price, certainly relative to our peers, isn't where it should be.

Robert Rowe, President and Chief Executive Officer

Again, going back to focusing on what's in front of us, if we're able to invest and if the financial community is more comfortable with Montana, ultimately, that's good for the company and very good for the customers.

Travis Meyer, Director of Corporate Finance and Investor Relations

It appears as though Andy Levi decided this was more fun than skiing after all and looks like he raised his hand again. Andy, do you have another question?

Andrew Levi, Analyst

No, addressing the last question about strategy, logically considering your stock price and P/E ratio, there's not much that can be done. Sure, you could consider a highly dilutive deal, but I see you as an attractive option for others. I recognize that you're not looking to pursue that route and want to enhance your value. However, based on your current stock price, there truly isn’t much you can do strategically. Is that correct?

Robert Rowe, President and Chief Executive Officer

And I would answer that by saying, where are you going skiing this weekend?

Andrew Levi, Analyst

Okay, that's fine.

Brian Bird, Chief Financial Officer

Yes. Andy, great commentary, but we're just going to take that as no question. I appreciate your opinion.

Robert Rowe, President and Chief Executive Officer

I will tell you as soon as worth here, I'm going to go out and play in that snow.

Travis Meyer, Director of Corporate Finance and Investor Relations

All right. With that, it looks like we've exhausted our Friday afternoon queue. I will hand it over to Bob and/or Brian to close out the call.

Robert Rowe, President and Chief Executive Officer

Just to finish the way we started, it's been fantastic to work with Brian as CFO for many, many years. He's going to do a great job as COO. All of the operational needs are looking forward to working with him in that capacity. Crystal, based on her career, is stepping into her new role just about as well prepared as can be. Thank you for spending your Friday with us before what is for everyone other than us a three-day weekend. As I said, I'm going to go outside and play in the snow. Have a good weekend.

Brian Bird, Chief Financial Officer

Bob, if I could, I'd like to say just a couple of things. First of all, likewise, Bob. I know our combined 30 years actually continues just with different roles. I enjoy continuing to enjoy our relationship and look forward to adding on to those years. I'm also excited for Crystal. I started this job 17 years ago in my early 40s, and that's where Crystal sits. I expect similar great things from her, probably even better than certainly my performance over that time period. Lastly, I'd like to thank Travis. Everybody knows Travis Meyer. He does a fantastic job. You may not know Tory Payne, who works with Tory. The two of them make a fantastic team, and I think one of the best IR departments in this space. Thank you to those guys for their help as well. Thank you to all of you who support the company. Really appreciate not only the support of the company, but the support you’ve given me as CFO. Thank you very much.

Travis Meyer, Director of Corporate Finance and Investor Relations

Thanks again for joining us. And with that, that brings us to the end of our webcast. You may now disconnect.