text:
NorthWestern Corp (NYSE:NWE)
2013 Investor Day
December 09, 2013 03:00 PM ET
Bob Rowe - President and CEO
Linn Draper - Chairman
Steve Adik - Director
Brian Bird - VP and CFO
John Hines - VP, Supply
Mike Cashell - VP, Transmission Gas and Electric
Curt Pohl - VP, Retail Operations
Pat Corcoran - VP, Regulations and Government Affairs
Heather Grahame - VP and General Counsel
Bobbi Schroeppel - Customer Care, Corporate Communications and Human Resources
Kendall Kliewer - VP and Controller
Bob Rowe
Good afternoon everyone. Thank you very much for joining us. I'm Bob Rowe, the CEO of NorthWestern Energy. This is one of our favorite Analyst and Investor sessions of the entire year. It's a great way to end the year, look forward to the next year. We really appreciate being able to gather with those of you in the financial community, both who are new to NorthWestern and our stock and who have been with us for a great many years.
I want to start, first of all, I thanking Dorothy and Whitney for their hospitality in making the great facilities available here, for this session as well as hosting our board meeting over the next day or so. It's by coincidence we happened to be here, just a couple of block from Rockefeller Center, and of course the holiday show is going on there. So I did actually see that the other night. So I will tell you, as Brian Bird starts to do the financial presentation I want you to put on your 3-D glasses.
We bragged a lot about our board of directors, and the management team that I am fortunate to work for and with every day and we thought it made a lot of sense to you and them and opportunity to me one another face to face. We have the majority of our board of directors here today and our entire management team. Tim Olson, our corporate secretary has given everyone a refresher on Rag FD. So we are well prepared for that.
For two reasons, both because of schedule and because we are recording this, we will have questions at the end, rather than during the presentation. I mentioned we do consider our Board of Directors, and our independent board structure to be one of the secrets. And you can think about governance. If anything, it's something that you really appreciate and you don't see it. It's the magic, it's the strength that keeps us focused, keeps us disciplined about execution, keeps us way from risky decisions that others might make, and we very much do believe that good governance from the board on down is one of the keys to our success.
Just to review what we will be doing here or not, forward-looking statements. And we do have a follow up program. I am going to introduce our board chair, just a few minutes and then I will come back to say just a couple or more things. And then I will be introducing our audit chair, Steve Adik; then Brian Bird our Chief Financial Officer who will review our financial situation, and then we will turn to in-depth reports in each of our key operational areas; energy supply, transmission, distribution as well as regulatory and legal, customer care, human resources, and corporate communications, financial reporting and benefits and then the closing comments, then we will have an opportunity for questions. So it's a full afternoon. We are covering a lot of ground and again for some of you this will be news and we will try to provide good comprehensive information. For others again, you've been with us, you've followed us for quite some time. We will be covering, in some cases around that you are somewhat familiar with already.
We are proud at NorthWestern of having embraced the independent chair model on our board of directors. There truly could be no finer board chairman than Dr. Linn Draper. Most of you I think, know a little bit about Linn. He is a PhD in Engineering. First career was as a college professor at University of Texas. He had an interesting very, very successful career in the electric utility business, ultimately becoming the CEO of American Electric Power, one of the most respected utilities in the United States And Linn was and still is one of the most respected leaders in the utility community, either currently serving or retired and in fact this last week was recognized by the National Association of Corporate Directors as one of the 100 key most influential directors in the United States last year.
As I introduce Linn to introduce and say a few words about the rest of the board, this was a picture that was taken in front of our Aberdeen Generating Station on a very cold October day, sometime ago. And that's why they're all looking a little bit uncomfortable out there trying to pose for the photograph. And so there is a great project for us, came online successfully, is providing real value to our South Dakota customers.
So with that I'll introduce Dr. Draper.
Linn Draper
Thanks Bob, and let me add my welcome to those Bob will very much appreciate your being here today. I'm not going to take long but I do want to say a word or two about our board. As Bob said, we have the majority of the directors here. We have a board that's relatively small. They are eight of us, six of whom are here today. And I'll go across from left to right in the photograph which you have in your packet of materials but before I got from left to right, let me start at the middle. Bob Rowe, who is our CEO. He's been the CEO now for about five years. He is an absolutely terrific leader. Bob has a great background. He was the Chair of the Montana Public Service Commission. So he understands our business both from the operational point of view as an executive, but also from the point of view of the regulators. He understands what's important to the regulators, to customers, and the other constituencies with which we're deal in. As I said, Bob has just been a superb leader, who has delivered in every respect over the last five years. Bob we're proud to have you as our leader.
As go across from left to right, I will ask the people who are here, six of us are here and two are coming in later but I'll ask people to stand briefly so you can take a look at them. First is Lou Peoples. Lou has a background of engineering and finance. He is CPA, as well as an engineer. He has had a carrier that's spanned three utility companies. He worked for Bechdel [ph]. He concluded his carrier as the Chief Executive of Orange and Rockland Utilities, not far from here in New York City. He has a great engineering insight, understands technology very well. Lou lives in Nevada. And Lou has been on the Board about seven years.
Next is Dorothy Bradley. Dorothy is a Montanan, a lifelong Montanan who has -- she is lawyer, who has a carrier in public service in Legislative, Judicial and Executive branches in the state of Montana involved with the universities, and she brings particular insight to the Board from the point of view of the customers in Montana and what makes the regulators and other elected and appointed officials in Montana check and why they think what they think about NorthWestern Energy.
Next in the picture is me, then Bob. Next is Steve Adik, Steve is, who is here, Steve is also an engineer. He started his carrier in the railroad business. He concluded it in the pipeline and electric and gas utility business. His most recent job before retirement was as Vice Chairman and Chief Financial Officer of NiSource Corporation. Steve is a finance guy. He heads our audit committee.
Next is Julia Johnson, who is not with us today. Julia is from Florida. She is the former Chairwoman of Florida Public Service Commission; again brings great knowledge and perspective from regulators. Julia is on the boards of several companies and runs her own consulting business, having to do with telecommunications and the electric and gas utilities.
The next person in the photograph is Dana Dykhouse. Dana is a banker in Sioux Falls, South Dakota. He has on the Board about four years. Dana brings the perspective of the South Dakota Company. He understands what is going on in South Dakota and brings to us that sort of wisdom, financial wisdom as well but in particular he is an expert what I would call human resources. He really understands how to train and motivate people and he has done a great job in his own bank, First Premier, but he has transferred those capabilities to NorthWestern.
And finally is Phil Maslowe. Phil is a Floridian. He has a background in finance, mainly workouts, bankruptcies, that sort of thing. He was an original member of the Broad when we were formed coming of bankruptcy nine years ago. There are four of us who have been around for nine years, Phil is one. At the time that we came out of bankruptcy his insights were particularly valuable, but he has chaired our Human Resources Committee for essentially the whole time, we have been a public corporation. He has a done terrific job. He is a finance guy as well.
So we have a mix of engineering, finance, utility and nonutility experience. We have diverse geographies, a couple of people in Florida, one is Texas, we've got one in Indiana. So we have experience across the United States, across the utility business and I think it's a group that has really stood us in good stead. Let me just say a sentence or two about what the Board does and how it interacts with the management.
I've been on a number of public company boards and I'm not seeing one in which there is such collaboration between the management and the Board. That doesn't mean that we're not hardnosed and questioning but it does mean that we have an ability to work together; the likes of which I'm not seen in another public companies. It really is a terrific collaborative relationship.
Our goal is to be in the utility business. We have no other objective. We wish to be a provider of the affordable, reliable, safe electricity and gas to customers. We are in the process over the years of gradually reintegrating the company, and by that I mean gradually restoring the generation capability which was spun off a number of years ago.
I think we're building toward a good mix of coal, gas, wind, and most recently an acquisition of hydropower, which we expect to conclude a year or so. I think it will give us terrific balance and will provide electricity and gas supplies to our customers in the long term that are affordable. We think it's in the best interest to the customers and we're anxious to see the transaction close.
So let me subside at that point. I'll pass it back to Bob and we'll all be available for questions at the conclusion.
Bob Rowe
Thank you, Linn. You see around you photographs of our service territory, of our facilities and equipment and particularly of our employees. The reason we're excited about what we do is because of the mission we have and the opportunity to work with these people to serve our customers and we appreciate all of you because your investment makes that mission possible.
Now to introduce very briefly the executives and they'll each come up and say a little bit and if you could stand up as well. But what I'll say about the entire team is, first of all, every one of them is very hands on. They've got a set of skills themselves, number one, number two. Each of them is tremendous team leader and behind them are many, many other very skilled and dedicated people. We feel pleased with the team that they're really able to work them.
Number three, they're all members of a team and of course the team you're on is I think they're more important than the team you lead and this group really does work together as the team, as we make decisions, as we go through the budgeting process, everyone from their own perspective does make sure that decisions are made as well as possibly can be and then execute it.
So, Kendall Kliewer, our Vice President and Controller; Pat Corcoran, our Vice President for Government and Regulatory Affairs; Brian Bird, Vice President and Chief Financial Officer; Bobbi Schroeppel, with his many hats, Customer Care, Corporate Communications and Human Resources and myself and Curtis Pohl, Vice President for Distribution; Heather Grahame, Vice President and General Counsel; John Hines, Vice President for Supply and Michael Cashell, Vice President for Transmission.
Now, each of these individuals has responsibilities again administering their own lines but also a tight connection to activities of others across the business and typically some kind of the support function they provide for others. This is our service territory. Again, many of you know our service territory, a number of you have actually visited.
This is a very large piece of geography. Nebraska natural gas relatively small area but it's been important, it's an exciting place to serve. That operates as part of our South Dakota operations and South Dakota, we're vertically integrated on the electric side and a gas utility as well, ongoing investment in distribution, transmission and a number of significant electric supply projects that John will focus on.
In Montana an extensive gas and electric transmission system, and then as John Hines will describe, we have been, as far as I know, perhaps the only utility that is really succeeding in reversing de-regulation, supply de-regulation in a state where the strong consensus that it did not make sense. And so we've been very active growth on the gas and electric side.
On the gas side the opportunities that we've been pursuing for our customers really are unique. We evaluate every decision we make as a company through our risk appetite screen and the starting point for that is our vision and mission, enriching lives through safe sustainable energy future. So it's a great part of the world to be serving. As you know we've been tremendously challenged by weather over the last week or so. In fact on our gas transmission system set a record for demand over the last several days, new record on the electric side, good news from a customer perspective is [indiscernible] have been out ensuring that the service continues, our assets have been performing very well. If you're blaming us for bringing this weather back to Manhattan, we apologize. Its utility weather to say the least and it certainly is Western and Midwestern weather.
As, Linn said we are focused on being a utility and being the best utility we can be. We're proud of the diversity across our service territory, customer types, service segments, our good strong tradition when 100 years of service in South Dakota, Nebraska and Montana, high levels of customers satisfaction. Bob you can provide some detail about what we are seeing there. And we've been able to largely execute on the commitments that we have made to our customers, to you as investors as well, good strong cash flows, supported by net operating loss carry forwards, as Brian will describe and good solid investment grade credit ratings.
Best practices corporate governance and again that's something that provides real strength in the background and that's something that has been increasingly recognized and we'll come back to talk about that. I've mentioned we've been able to deliver on our project commitments. These are commitments to our customers as well as to you particularly in the area we're integrating electric and gas supply. Curtis Pohl will provide some detail of course up close and personal about our distribution system infrastructure plan and similar initiatives on the transmission side.
To talk about, here are the rough justice 80/20 rule in terms of currently about 80% in Montana rough justice 80% electric, 80% residential and that gives you the numbers there. We serve a part of the country that may not grow as dramatically as at some points in time other parts of the country do, but it's an incredibly stable part of the country and indeed that's a very, very good thing.
Our states consistently have had an employment rates below the national average. The write off to revenue ratio is among the very best in the country. Our customers pay their bills and that's also an indication of the relative degree of financial stress, and even population growth, that's been more attractive in Montana, South Dakota and little bit even in Nebraska, the national impact and some of them out over the last couple of weeks in different parts of our service territory and in some areas our folks are saying there is a new connect, as robust as at any point before the recession.
So things are starting to pick up. This is one slide that gives you a lot of information that you'll be interested in, in one hopefully fairly usable way. This is a snapshot as of the end of 2012, with the implementation dates by jurisdiction for various orders, electric, gas, specific positions, Montana for example conserving coal strip, DGGS, the estimated rate base in each area authorized ROE, where the Board is available, authorize return on equity and authorized equity level again where that's available. And then at the bottom a breakdown at a high level of rate base, starting with again this is end of 2012. So this doesn't reflect several of our natural gas supply acquisitions in Montana, written from top to bottom, natural gas reserves, the addition of the Spion Kop wind plant, the ex-generating station close to being Colstrip Unit 4, and all of our other rate base and ongoing investment.
We know that more on the corporate governance side we are pleased that our good works are being recognized here. We've clawed our way into the public utility fortnightly top 40 which is a multi-year index. So it really recognizes the same financial performance. I'm pleased personally that our ethics program has been recognized as one of the very finest by the New York Stock Exchange, it's Corpedia affiliate. That's something that is important to all of us in the company. Three years in a row, we've been recognized by Forbes as one of the 100 most trustworthy companies in the United States, added to the New York Stock Exchange Century Index, which has a record of very strong performance.
Glass Lewis, a number of years ago recognized us as one of the few companies in the United States that both excelled in terms of transparency, in its disclosures and excelled in terms of conservative, executive compensation policies, and then Corporate Secretary has recognized us now twice as one of the five best proxy statements in the small and mid-cap category and again that speaks to the quality of disclosure we intend to provide all of you.
We're also serious about Corporate Citizenship. We like to say that when we do well and we're focused on being the best utility we can be, it's good for our customers and communities and when our communities are thriving, when our customers are doing well and certainly it's good for us too. Recognized last year as the Business Of The Year by the Montana Ambassadors, pulled all of our community facing programs together in what we call our Community Works Program, externable [ph] activity, sponsorships, economic development support and we take very seriously our worksite health and wellness programs as well.
Now I'm going to introduce Steve Haddock, Chair of our Audit Committee. We have a deliberative board. This is something that Steve I think has really done a better job perhaps than any of us in ensuring that issues are looked at on the Audit Committee from every possible perspective, the discussions are robust, they are thorough, but at the end of those discussions everyone does come together and focus on execution. So Steve.
Steve Adik
Thanks Bob. So I look around it's. I looked at the attendees earlier and I said to the management, I've got good news and bad news for you. I said looking at the nametags, I said I know a lot of these people that are coming today. I said that's the good news. The bad news is, a lot of people that are coming today know me. This has probably been -- the most rewarding experience I've had is to be on the Board here at Northwestern. Since I left NiSource I've been on quite a number of boards. This one I've looked at you gives me the most pleasure. When I get home from our board meetings, which typically last three days, I'm always on a high. My wife loves it when I come back from this board. When I come back from other boards she's not so happy but with this one she's ecstatic.
I think the reason for that is that there was a decision made from a corporate governance standpoint by Bob and by Linn a number of years ago that you cannot understand a company by sitting in a boardroom and going through show and tell; that you really got to get out, you've got to see what the company does, you've got to get out in the field, you've to get out in the operating headquarters and you got to meet the employees face-to-face, you've got to meet the regulators face-to-face, and you've got to meet the customers face-to-face.
So Bob and Linn moved most of our meetings during the year from corporate headquarters where boards traditionally meet out into the field. Over the last five years I think we've gotten to the point now where we have met probably 80% of the employees in this Company. I don't think there is another company of our type in the utility business where board members have met more than a fraction of the employees.
And in doing that, we understand what the problems of the Company are, what the problems of the employees are, what the customers are looking for and what the regulators are looking for. That makes our meetings much more robust. When Linn was talking about collaboration, it's collaboration but it's collaboration in a way that is I think atypical for most corporations. We get a lot of pushback. The Board is very aggressive, the Board has a lot of questions, the Board looks for a lot of information. The management however, is very capable of pushing back when they feel that the Board's thoughts should be moderated. And so we have a dynamic give and take at our Board meetings which doesn't exist at any of the other companies I've seen. In most cases you don't have that.
Put that in perspective at our audit committee meetings, our audit committee meetings typically run four hours. Four hours, we typically have no less than 25 people. We've had over 30, close to 35 coming to the audit committee and people expressing their thoughts and a lot of give and take to where decisions that are made, either at the Board level, the Audit or the Committee levels, are well discussed before a decision has made. In the end, if you remember Benjamin Franklin, he said surely we must all hang together, otherwise we'll all hang separately. It's a same thing here. We believe we're all in it together, the Board and the management together are what makes this Company.
Now Bob had a chart up here about corporate governance and ethics, and I don't know how many of you may have seen the research paper that came out about a month ago. And what it said was that corporations with the highest level of governance and a highest level of ethics, that do the best for their customers and do the best for their communities are the ones who do the best for their shareholders. And if you take a look at -- if you go back, I don't recall exactly the name of the research article, you go back they cite a number of companies, and we believe that is what is the key to our success.
We have a great corporate culture, a great understanding of what we do, a great team that works collaboratively together but is capable of disagreeing until the decision is made and then once it's made, getting behind it. And I think that's probably the key to our success. As you've seen we've outperformed the utility industry, we've outperformed the utility indices. I think in our peer group this year we are at the top or close to the top. But we believe it's because of the way we function as a company. And as I said, that starts with a Board understanding what the business is like.
And I'll close with something that is dear to my heart and that is that we are all unlike any other utility I know. We are all as Board members encouraged to go out between Board meetings to the field to meet people. We have some Board members who have client polls and in lineman's room [ph] [indiscernible]. Our CEO has done the same thing. But we are all encouraged to go out on our own and meet with employees. Sometimes that can be scary for the local management. So I give you one I believe true story. My wife says my stories are embellish, I don't believe that, but anyhow.
We're on our way back and there were a number of us that went out Colstrip because we have an interesting plant at Colstrip. And we went out to Colstrip for the day to -- this is another one of those things of visiting things personally. And on the way back we stopped in Billings, Montana and I said I'm going to be at Billings the end of the day, to get everybody together, so we had a room like this. We had about 100 people, mostly union people, we had the management there. And as each of us from the Board go out into the field, we always start by saying you can ask anything you want. Well, about that time the management got up and backed up against the wall. I think they've been watching The Sopranos and knew that the bullets come, you want to see where they're coming from.
So the management is totally petrified when I say anything is fair game. Hands go up; first question. What does the company look for in a Board member? Management looks a little bit closer to middle of the room. Second question; what's the role of the Board compared to the role of management? And this goes on in this kind of vein and these are primarily union people who have understood or want to understand what the governance situation of the company is, how the company functions and are not about to raise study issues because they are looking for answers to more important things that are on their mind and that's what the kind of culture that Bob and his team have built in this company.
So I have to say in closing, I'm proud of this company. I believe we have the best corporate governance in the country. Just ask any other Board how many times they've been out in the field. Just ask any other Board how many members of the company, how many employees they've met. Just ask any other Board how many sites they've visited. And to put that in perspective, because of our service territory that you saw, we have to have three days for Board meetings.
Not only we have to have three days but we have to have three days because the decision was made that all of us will attend all committee meetings. So you don't have a situation as you have in many companies where all meetings are at the same time and people don't get to interact. At our Company every Board member goes to every committee meeting and consequently every Board member is aware of what's going on throughout the entire company.
I'll tell you I am proud of this Company. I am proud of what this Company has done, I am proud of the management of this Company and I hope you are proud of what they have accomplished for you as investors. Thank you.
Bob Rowe
I think that's the first applause ever at an Analyst presentation. Congratulations. Brian should we just stop there you think? Brian is the member of the Executive team I think you all are the most familiar with. Brian gets a tremendous amount of credit along with his great team for the success that we have achieved. Brian?
Brian Bird
Thanks Bob. Glad to see a lot of familiar faces of course today, but equally pleased to see a lot of new faces showing interest in the company. I think as we have mentioned here, over the past five years we have had very, very good performance. I will share some slides to talk about that. But first and foremost, in terms of our earnings guidance, I want to talk about the past five year's performance terms of vast improvement obviously from 2008 through 2012. The blue bars are our GAAP EPS, the green boxes are our initial guidance range and the red line actually shows where our adjusted earnings came out for a particular year.
And so over that five year time period, two things I would point out; not only great growth in earnings but relatively close to the guidance that we provided. In 2011 and 2012 our GAAP earnings were slightly higher. In 2011 it was a bit higher because of a tax rate decrease that wasn't anticipated. And in 2012 we had a very good outcome from litigations, called our [indiscernible] litigation that offset some negative items during the year that also resulted in a very good outcome.
Regarding 2013, in terms of our guidance we did increase our guidance from. It was $2.40 to $2.55 to $2.45 to $2.60 per diluted share. One thing I would point out on that, we do -- in terms of our guidance we try to normalize weather. We are having a fantastic weather in Montana. It's very cool, but we will adjust that out. Now remember last year we had very mild weather. We adjusted that out as well. And that's why we do that, for comparisons on a year-over-year basis. The other thing I would point out is as a result of the hydro transaction, which we'll spend a lot of time on today, we are excluding those costs from our guidance, going forward basis in '13 and as you will see in a moment in '14.
In terms of track record delivering results, from an ROE perspective the Company has been very focused in improving our ROEs over time and we have certainly moving up from kind of 8.5% in 2008 to obviously 11% in 2011 and '12 to be fair because of those strong GAAP earnings that we achieved in 2011 and 2012 put us up to 11% ROE. On an adjusted basis there is about 10.5% and 9.8%.
In 2013 we're going to be right around the 10% ROE and in fact we think of ourselves as an ROE Company, kind of in that 9.5% to 10% range. And in fact our authorized ROEs are around 10%, because of regulatory lag we expect to perform in between that range.
Regarding dividend per share and dividend payout ratio, you might notice the blue bars on the bottom show our dividend that we pay. For 2008 to 2010 we are increasing our dividend only about $0.02 a share. The reason for that is we have a dividend payout ratio of 60% to 70%. And we were over that and we heard some concerns in the commission and a result we decided to make an effort to get within that range as quickly as we could and we communicated we could do that by 2009.
As we've achieved that we have found ourselves all of a sudden, because of the earnings growth we experienced to be at the low end of our dividend payout ratio and in fact we've had to increase our dividends over the last three years, $0.08 in '11 and $0.04 in '12 and '13. And it's a good problem to have. Being at the bottom end of our range, the 60% to 70% payout, as earnings grow we're going to have to grow that dividend commensurately with our earnings. In fact we have seen that. It notes here that we have a dividend growth rate of about 3% over the time period shown. But over the last three years it's actually been closer to 4%. And again, when we talk about earnings guidance, there is going to be an expectation to keep that dividend to grow along with earnings and we'll demonstrate in a moment.
Investment from our customers benefits, one of our favorite slides. It's very unique for a company who has been able to double its rate base effectively in a five year time period, show on our cumulative annual growth rate about almost a 15% growth rate, from rate base of just about a 11% from an earnings perspective over that time year, five year time year, but more importantly is being able to do that, when actually having a decrease in overall cost to customers. You can see in the bottom half of that page the electric revenue per megawatt hour. It's been up about 2%, pardon me. And on the gas side we've actually experienced a decrease.
So very, very low impact on our customers. And so anybody who is talking about how you are growing your rate base, the first question you should ask is how are you able to do that without impacting customers. One of the competitive advantages this company has is its ability to re-integrate our supply portfolio. In other words, historically because of the PPAs we have had we had to procure power from others, pass that through to our customers, will they pay for, and of course we earn nothing on that. As we've continued to invest in rate base and earn these, and own these assets ourselves, we have been able to earn on those assets and increase our earnings, when in fact ultimately what the customers are paying is essentially the same.
And the other benefit for customers, what we're trying to do is get away from the world of PPAs, where you have the vagaries of what's happening in the marketplace to enter into long term arrangements by owning these assets to provide stability to customers for 30 years or so into the future. So very, very pleased about that and it is a part of our continued growth strategy moving forward.
In terms of total shareholder return, because of this competitive advantage and I think the things that Linn, and Bob and Steve were talking about, we're seeing very, very good performance. This chart at the top shows our total shareholder return since emergence from bankruptcy. I hope most of the folks in this room know that this company was in bankruptcy, emerged in November of 2004. There has been a tremendous turn around since that time.
As a matter of fact over this time period of almost 10 years, NorthWestern set a 160% total shareholder return, versus our peers around a 120% and the DJUA around 125%. And then obviously that performance has been particularly strong over the last five years and you can see the last 12 months, one year, last three years and last five years, very, very strong performance versus our peers in the DJUA and the S&P600 SmallCap.
The last thing I'd want to point out in the slide though is you can really take the top chart and divide it in half. The first five years that this company has been emerged from bankruptcy, really our intent was to get back on stronger financial footing. We had to deal with a lot of post-bankruptcy issues, a lot of issues that took a lot of attention away from doing the best for our shareholders and customers.
But right around 2008 we made significant progress. We brought on Bob as our CEO and by the way, not only it helped us to improve our regulatory environment, but it's helped us to achieve on our goal strategy as well. And even more importantly, I think and as referenced here today, the culture of this company has changed dramatically. So we are not just performing on those measures, but you can go down the list, from safety, reliability, customer satisfaction, and the list can go on. So we we're feeling very, very good about where the company is going, not only from a financial perspective but on overall performance as well.
Another competitive advantage we have is net operating losses. One of the benefits that we did have from the bankruptcy is the ability to the non-cash tax payer for this 10 year period. And we will continue to utilize NOLs into the future. The top part of the chart shows components of free cash flow, cash flow from operations, plus your maintenance CapEx, plus your dividend, and we still have approximately $40 million to $60 million of free cash flow to invest in our growth story. And that's been very, very helpful. Fitch notes, little advertisement there that we are one of the few utilities that has the positive free cash flow story. And then Glen Grabelsky is still here from Fitch. So he is happy to see that we're still doing that advertising. Also I should note, in terms of NOLs, we do continue to use those. We expect to utilize NOLs beyond 2016, but I will tell you if we do close on the hydro transaction, we expect to utilize NOLs in 2016.
In terms of balance sheet strength, very quickly and credit ratings perspective; upper left we focus on senior secured credit ratings. All of our long-term debt, our first mortgage bond, senior secured issues and they are either at a low or mid-single A. We are on a positive outlook, positive watch outlook from Fitch and Glen if you're watching today, that's good. And we continue to focus on the rating agencies from the Hydro transaction by the way. All three have been very, very positive on that transaction and we note that that would be good for creditors on a going forward basis.
Upper right just shows the trajectory of our credit ratings and obviously the first five years that I talked about as we've emerged from bankruptcy we focused on getting to what we needed to do to get to a stronger financial footing, probably not investing as much as we wanted in our system, but certainly made strides since that time.
The bottom left is debt-to-capital ratio. It's one ratio that we let investors, creditors, all folks kind of know where we stand from a credit perspective. We want to be in a debt-to-capital between 50% and 55%. We have been at the high end of that range. We are chipping away and we do expect to be at the end of 2013, doing on an average, right around 54%.
And lastly no significant debt maturities until 2016. Bob is going to go up in a minute and talk about growth projects but one thing we should point out in terms of our existing business, we continue to invest and maintain our existing business at a higher level each and every year. As matter of fact, the amount of investment above depreciation on a cumulative basis over in 2008 to 2012 has been 150 million. So again drawing a rate base but more importantly investing in our infrastructure to the benefit of our customers.
This slide just for your purposes, as you reference the materials, you'll see each of VPs that talk about the operations, they'll talk about they're 2014 capital needs. This slide just shows the change between what was there in the 2012 10-K and what we will be talking about today in terms of our budgeted 2014 capital.
And lastly on 2014 earnings guidance, at EEI, we shared wide ranges in terms of what our earnings guidance was and we've been doing that for the last several years. What we have done today, because we're having an Analyst Day, typically something we do in February, we're providing our 2014 earnings guidance. That range is $2.60 to $2.75 per diluted share.
A couple of things I do want to point out. Again that's based on normal weather in both our electric and natural gas businesses. It does exclude any hydro related transaction cost in 2014 and excludes any hydro related earnings, if in fact the hydro transaction is approved and closed.
The consolidated tax rate we're showing here is 14% to 16%. You may recall that relates to a 12% that we have in 2013. The increase is due to the fact in 2014 we expect bonus depreciation to go away. And then lastly, diluted average shares of 39.3 million, that's approximately $1 million higher than we used for 2013.
So before I push it back Bob, I do want to point out that the company does look at our growth and from an earnings perspective, a 4% to 6% growth rate. You could argue that that's relatively conservative, considering that the last five years, that's been over 10%. And because of our anticipated dividend yield of 3% to 4%, we expect a total return of 7% to 10%. One thing I would point out on that dividend yield by the way, because of our NOL, the ability for us to pay a comfortable dividend is quite easy.
So with that, I will turn it back over to Bob.
Bob Rowe
Thank you, Brian. I will say a couple of things to introduce the leaders of our three operational areas and move on from there. We will provide you more detail about again the diverse portfolio projects that we have, Energy Supply, the pending hydro transaction obviously, Big Stone, Neal [ph], pollution control, additional acquisition in natural gas on Montana side in particular. On the Transmission side, network upgrades to serve our existing customer needs and compliance work on transmission side in particular, and them some real focus on our distribution level initiatives.
If you've been with us for a while, you know this slide pretty well. If this is your first time, what we've tried to do a number of years was provide a one slide overview of all of our primary projects and there are some things that are not on here. We don't include a project until there is sufficient definition around it in terms of putting resources to it so that it actually makes sense to disclose. This is in the perspective of the slide.
And we used the red, yellow, green stoplights. So red if the project is in trouble, yellow it hasn't yet got the green light. What you will see here is all green and two of the projects, the South Dakota Peaker at Aberdeen, and the Spion Kop Montana wind generation, they're actually now complete.
So we're focusing on, to some extent a little a bit smaller set again in defined projects in energy supply. It's the hydro acquisition, pollution control. Peaker and Spion Kop as I mentioned are done and then the natural gas reverses which is quite a long term and ambitious project that John will provide some more detail about. And then the distribution, the DSIP in Montana, the transmission projects are either in base or being developed and Mike Cashell will provide you more detail there.
And moving over the right you've got the amount of capital you've spent so far. The lower to higher range capital opportunity and then the jurisdiction; Montana, South Dakota, and obliviously parts of on the transmission side during first jurisdiction as well.
So that's kind of an overview. And then to set up a discussion of the hydro acquisition that John Hines will go into in much more detail. The graph of the top shows, this is companywide for NorthWestern, both South Dakota and Montana on the electric side, as a comparison to our peer group and the peer average you will see is right around 90% owned resources to serve their customers.
Montana, currently companywide Montana and South Dakota, we own about 44% of the resources needed to serve our customer loads. With the hydro acquisition if approved by the Montana Commission, that would move up to 69%. Lower left is a breakdown of 2012 actual. Lower right is what we would look like again with the hydro acquisition. You can see in South Dakota, we own about 99% of the resources needed to meet our current load, in Montana 31%.
Post transaction we would own about 63% in Montana and 69% companywide. So this is something we think makes a lot of sense for our customers. I mentioned that we evaluate every project from a number of different perspectives, thinking about it. First and foremost does this make sense for our customers? Our view here is very clear if it does and kind of the public response that we've received so far has been really overwhelmingly positive.
So, we believe this does provide tremendous long term value for our customers. It will be impossible to overstate the significance of these resources in Montana and the value of the Montana, of having these under overall [ph] control to the Montana communities. Again, from that kind of perspective this transaction so far has been very well received.
From an employee perspective, we have employees and we'll go into this in a little bit more detail, who have great experience currently working for us, who essentially grew up in their careers in hydro operations, we're bringing into the company, we have some great employees from PPLs, hydro operations in Montana. So we think of it as provides some real value for employee growth and development.
And then in terms of your interest, clearly this is a strong benefit from an investor perspective, inclusion of these assets into the regulated rate base. So, we believe these will in fact enhance our ability to invest in our business companywide and be positive on both the equity and the debt side. So this was for us a very, very compelling transaction.
I'll now introduce John Hines, another great leader. John is responsible for our electric and gas supply operations, again in all three jurisdictions. John?
John Hines
Thank you everybody. I'd like to express my appreciation for you taking time on your busy days to spend a couple of hours with us to learn more about NorthWestern. Just before I get into my actual presentation, I'll go little bit off script. I've mentioned a slide that again Bob talked about, where we're about 31% owned generation in Montana and in my mind it's such a win-win for both customers and for the utility. Right now, in 2012, we had around 55% of our entire portfolio being acquired from the market and obviously you can't get long term market acquisitions to serve our portfolio need.
So, obtaining this generation and fixing it at a long term stably priced level for customers, that obviously is in their benefit and the commission so far in the acquisitions that we brought forward to them, which is a natural gas plant, ownership share in a Colstrip thermal plant as well as the wind plant, they've viewed it in the same way. And then obviously from the company perspective, the shareholder perspective, it's very beneficial for the company as well.
So, moving from 31% ownership that we currently are in to something much higher is something that we think like I said a win-win for both the customers and our shareholders. I'd like to give you just a few facts, just to give you some background on NorthWestern. Some of you may already know these as well as I do, but for those of who are new to company, I'll just give you a little bit of background information. We serve around 340,000 customers, electric customers in Montana, around 183,000 for natural gas.
In South Dakota and Nebraska, we serve around 86,000 customers, a combination and then around 60,000 customers on the electricity side. We have around 1250 megawatt peak load in Montana for electricity and for our core natural gas customer requirement, it's around 20 billion cubic feet per year.
In South Dakota, we have around 180 megawatt average with would load serving requirement and around 340 megawatts of peaking capacity requirement that we need to meet. We don't provide electricity service in Nebraska but we do provide natural gas service and that's around 5 billion cubic feet per year, just slightly under 5 billion, and for our south Dakota customers it just slightly above 5 billion cubic feet.
In Montana, we own three electric generation assets. One is the Colstrip plant, a 220 megawatt ownership. It's a partial ownership of the facilities. There is four generation facilities. Colstrip 1, 2, 3 and 4 are at Colstrip and while we only own percentage of Colstrip 4, we have what we call a reciprocal sharing agreement with PPL. So, if there is an outage at Colstrip 4, we're able to get partial compensation from a power supply perspective from their ownership and Colstrip 3 and vice versa. So, as you may know right now Colstrip 4 is down. We're still getting 50% of the power that we usually would from facility because of that reciprocal sharing agreement.
We have 40 megawatts Spion Kop wind facility that Bob mentioned a little bit ago. It's been operational for a little bit over a year and we're seeing very good wind value out of that facility and we're slightly exceeding what our estimates were for that output. So, we're very pleased with that.
The 150 megawatt, excuse me, the 150 megawatt other resource that you see in the upper right chart, that's related to the Dave Gates generation station, just as a footnote while that is an energy supply resource. Energy supply is only getting around 7 megawatts, out of that facility and the rest of it is dedicated to providing regulation service for not only NorthWestern's core customers but the entire balancing authorities requirements as well. A good portion of that regulation service is being used to address our wind resources that we have in our portfolio. We have around 235 megawatts under contract right now for our wind portfolio in Montana. In South Dakota you see we have around a 166 megawatts of other resources that's about, comprised of almost entirely natural gas and oil-diesel fired peaking generation and then our base load coal of around 210 megawatts, so using CRR, our total loan generation is around 788 megawatts for the entire portfolio.
The 412 one is something that we're focusing on right now though, because of the difference between what our total portfolio requirements are and what we have currently under ownership. In the category below the natural gas, we're making strong strides for acquiring reserves to meet our core gas requirements in Montana. We have around like I noted about 20 billion feet of requirement per year and we're around 37-38% of meeting that requirement at this point in time. I'll talk a little bit more in detail in a later slide about what we see as our continued growth strategy in natural gas.
Then I'd just like to kind of talk with you briefly about some of our primary responsibilities that we have under the supply function, first one is that we undertake effective planning and acquisitions to meet our electricity and natural gas customers needs, as several of the previous speakers have noted the weather over this past week has actually reaffirmed our finding and acquisition techniques and capabilities, I know, I think in Montana we've been below zero even for the high, since last Tuesday morning and think we're a minus 38 in several of our communities, I see some grimaces but you know it's cold here too, anyway minus 38 two days ago and we were able to adequately and sufficiently meet our supply obligations. We also are now operating some of our generation fleet, we're co-owners at some of the fleets, but we're also owner at our Dave Gates generation station and operators, and we're also doing that other Spion Kop wind facility.
We have a real time and a term trading force so we're able to maximize our opportunities to buy and sell electricity to match our portfolio requirements and also, which is actually a good mesh, you don't see this in a lot of companies, we have the environmental function within the overall supply function and they're very closely related even though that function serves all of the utility, there's a lot obviously of the issues for us that in generation compartment so we're able to get real good synergies there. The, just a couple of issues I want to talk with you about where I'm going to address and the remaining portion of my presentation here. In Montana, obviously the hydros are a big piece of what's going on right now, but also I want to make sure you're aware of our natural gas acquisition strategy. And then in South Dakota, what we're seeing right now, is, we currently are within the Western Area Power Authority footprint.
They are, it's an organized market we used as an organized market, but they're going to be moving into a broader footprint into a broader organized market, most likely going to be the SBP market and what, there's two basically results that are coming now, that one, our kind of our overall transmission authority issues are going to be modified a little bit, but also right now we have a 7% reserve margin that we're supposed to carry under WAPA, and as we transition over the next two to three years to the SBP we'll have an expected 11-15% reserve margin, so additional capacity serving need is going to be put upon us. Here is a slide, this is the energy supply component out of the capital budget that you've already seen, we're $50 million, the primary driver for that for 2014 is our Big Stone and Neal 4 environmental upgrade. These upgrades are being done in response to environmental regulation, primarily Regional Haze requirements, we will have, that part of those projects will be completed and we're expecting Big Stone to be completed at the end of 2015 and we're expecting Neal 4 environmental upgrade to be completed in the latter part of 2014, one thing that you won't see and you don't see in this slide though, is also the additional expected capital expend on the hydro system assuming favorable regulatory approval will be incorporated in part in 2014 but certainly in 2015 offsetting the completion of the Big Stone and the Neo4 upgrades.
Now this is -- spend a little bit of time on the hydro assets you probably the feeling from almost the entire the entire NorthWestern executive team and the Board the excitement that we have about this opportunity. This is truly what we view as a once in a lifetime unique opportunity where existing large scale hydro generation is available within our service territory that we have the opportunity to avail ourselves. And you look at all the attributes, benefits and the potential cost and from our perspective the benefits far out way any of the cost associated with this transaction ranging from price stability to environmental benefits to actually long term lower cost resource for our customers as in the side we really don't have a lot of different opportunities for serving our customers' needs.
As Bob noted, we, the formal Montana power company I should say divested themselves of all of their generation assets in Montana. And basically the portfolio was being served 100% at that time from market purchases, our short-term PPAs, our meeting term PPAs. This is an opportunity where we can take out a lot of that market risk and give our customers long term stability while obviously having a very positive research for shareholders as well. We are looking at around 633 megawatt capacity hydro resources it's made up of 11 different generation facilities located in both sides of the continental divide. We have under different projects on FERC licensing requirements. We have multiple generation sites, which helps us from a water perspective ensuring that we have greater forecasting capability. These are one of the rarer facilities which generally limits the environmental issues associated with them. Some of you may be aware of the larger dams in the Pacific Northwest that has significant [Salmon] issues associated with them. These facilities were one there is no [Salmon] in Montana. But also because if it's one of the river there is very little ability to modify the operations in order to address any sort of fish and wildlife obligations.
The purchase price for this facility the sum of the facilities is 900 million well there will be some post-closing adjustments either plus or minus we'll have to wait and see till the actual closings and what that is. And obviously the biggest component on this is in order for this transaction to be closed upon we need favorable regulatory approval by the Montana Public Service Commission. Pat Corcoran will talk a little bit more about it from the regulatory perspective but we expect to make our filing in within the next 10 days, or 11 days I guess it is. And then the commission has nine months to make the approval of the decision on that.
Couple of the other things takeaway on this slide or maybe two small [see hook] you'll have hand-outs is that if you look at the five year average capacity factor you'll see that those are very high for hydro facilities, that's a reflection of the run of the river characteristics of these facilities but it also will be very helpful and us providing base load power for our customers for the long term.
This slide here gives you a couple of different perspectives; one, it speaks to the point that I've made already as far as how much impact the hydro facility will have on our portfolio. We're looking at around 38% of our total portfolio needs being provided by the hydro facilities. You can see the other pieces of our portfolio. Key to this I think it will positioning our portfolio to meet the needs and the requirements of the next centuries that our entire portfolio will be comprised of over 50% renewable assets with the addition of the hydro facility. The other key take away from my perspective as you look at and I think there is the amount of market purchases that will be remaining, it's 10% and it still provides growth opportunity I'll speak to that in a little bit more detail in moment. But it's manageable from a risk perspective for our portfolio but it also does provide some additional growth opportunity in Montana. The slide on the right is just a depiction at Montana where those hydro facilities are located and as you'll they are located throughout the state.
The next slide here is just one of the benefits the hydro facilities will provide. It's very unusual when you're looking out to and you're buying an existing generation source to have that generation fit so well to address your portfolios' needs. We've broken this does into light load hours and heavy load hours, our off-peak and on-peak. You can see that with the addition of the hydro resources, it's an incredible fit on our light load or off-peak hours. You will note that there is a little side bar talking about the conveyance of Kerr Dam down to the Confederate Salish Kootenai tribe. What that means there is one dam the Kerr dam located in NorthWestern Montana that [indiscernible] FERC license, the tribe has the ability to exercise the option to acquire that resource beginning September 2015, NorthWestern doesn't have a say on whether they want to exercise that or not, we incorporated that in our valuation in an appropriate manner and we expect the trial 2 exercise that option. So from this 200 or 633 megawatts of total capacity that is the initial transaction would constitute around 194 megawatts are associated with the Kerr dam and that will transfer we're assuming to the tribe. So that gives us around 428 megawatts of actual capacity of hydro resource.
The chart below the heavy loader on peak chart gives you graphical depiction of what we see the potential growth for additional generation in Montana. We will be looking at three things as far as how to address that need but caveat that person foremost we're going to -- we're focusing on getting this transaction completed before the public service commission, and not only that but we're also working on a day to day basis on ensuring that the transition is very seamless as far as incorporating the assets into the portfolio, managing the portfolio and also incorporating 75 to 85 additional employees that will be coming this hydro facility.
And just spend 10 seconds on that, this work force with the PKO Montana are extremely well trained, they have done a great job many of those people worked for the previous Montana power company. And in both our due diligence and our on-going operations with these facilities we NorthWestern have internal some folks with over 40 years of experience and many of those are associated with the hydro facility in fact the head of our generation department I think he began working for utility 45 years or 46 years ago and I think he started out mowing the lawns at these hydro facilities.
So you can't get much better in depth experience [indiscernible] I think he didn't stay there, he ended up on actually operating and overseeing the operation of the hydro-facilities for the Montana power company.
Unidentified Company Representative
Just a quick outline of how we have gone through and evaluated this, we have always been looking for assets and these PPO assets, in particular for quite a long time Brian noted once we reached a certain financial capability, we looked at the assets because they are such a natural fit for us and especially the hydros because of their renewable attributes, their long term generation capability. So that always has been in the back of our mind, we looked at the valuation from a variety of different perspectives and just need to caveat one of the things while we're looking at how we can value these resources almost always first questions that came up was whatever purchase price we come up with, what is the effect going to be on our customers.
It didn't matter if we're able to actually be successful in acquiring the assets if the ultimate price was going to be so significant that our rate pairs wouldn't be able to absorb it. What we're looking at now what we'll be filing before our regulatory commission is we're [indiscernible] see around a 4.2% rate increase the first year out. Then if you look in real terms that price will be going down the costs of those assets will be going down after the first couple of years into the future basically depreciation level overwhelms the additional CapEx that we'll be spending to maintain and operate the facilities. We're now at the post signing stage of it, we're making the filing like I said in the next couple of weeks and then we're continuing our transition efforts to make sure that we can have a smooth transition assuming a positive approval by the commission.
And then post approval we expect to close fairly quickly on a positive regulatory decision and we'll execute the permanent financing at that point in time.
I have talked a lot about already with the great fit that the hydro facility has provided to us, key to us right now is the non-carbon emitting aspect of it, in our modeling there is a tremendous amount of risk that we're seeing and forecasting associated with any type of thermal generation and this is a great hedge on-going, as well as there is no fuel cost associated with this facility, so once again leading to greater price stability for our customers.
I guess the other thing just want to mention here is that we also feel very fortunate that these assets came available to us at a point in time. In part the pricing of these assets were based upon the forward market curves and we're at a very low point in the overall price cycle, we think for electricity prices, so we're able to take advantage of that and that value will be reflected and passed on to customers through lower rates.
Now turning a little bit to the Big Stone and Neal Air Quality projects as I noted earlier these are being developed in response to new environmental air quality regulations. We have a fixed stock around a 111 megawatt of power. We expect that project to be completed at the end of 2015 or else early in 2016. Right now we're on schedule, actually a little bit ahead of schedule as well as slightly under budget. Good project management is going on there and we are expecting the New York Power Plant also to be online and on time as far as the construction project. And also it will be coming in and what we think as estimated budget at that point in time. These projects are base load projects for serving our South Dakota electricity needs. We also have significant growth. We have fairly good growth in our peaking needs in South Dakota, beyond just moving to the SVP market and we expect that we will be seeing – we built the Aberdeen Plant in response to that and we're expecting to see some additional growth. And we did issue it in RFP for additional capacity in South Dakota for the 2017 through 2025 and we are looking at around 30 megawatts to 60 megawatts; 30 megawatts short-term, 60 megawatts long-term from leading that need.
Finally just want to talk a little bit about the national gas reserve opportunities that we're addressing in Montana. Once again the national gas markets had a fairly low as most as all of you know I am sure, a fairly low cyclical moment. And also lot of the owners, especially of large reserves are moving out of conventional natural gas and moving into the more liquid market. It provides NorthWestern a really good opportunity to be focused on providing long-term stable gas supply for its customers. We are looking at doing that for not only our core gas customers but also acquiring some natural gas reserve, our Dave Gates Generation Station and our Basin Plant natural gas generation station need. We have a goal of around 50% of our overall needs being met for our core gas customer needs; it's around 10 bcf a year, from our own ownership. Right now we are around 37% of ownership took over to meeting that goal and we are yet to acquire any natural gas reserves for our two [indiscernible] generation facilities. So we still see a significant opportunity for acquiring natural gas to meet our customers' needs in Montana.
And just to notify, this is also an excellent growth opportunity for another reason. It's not like on an electric generation side where you go and acquire a plant and then operates into the future at the same level for a long-term. With natural gas fields, especially one of our objectives here is proven gas reserves that have been in operation for quite some time. Those fuels deplete at a fairly identifiable level over time. And we are seeing around an 8% per year depletion level. So this is an on-going investment opportunity that we see for NorthWestern and it also – we will continue to provide long-term price stability for our customers.
This final slide here just gives you a little bit more information on what we're calling the South Bear Paw acquisition formally known as the Devon Gas Fields. This is around 64.5 billion cubic field proven reserves and we are also acquiring and 82% share in Havre Pipeline which should actually help enhance our reliability as well as it provide additional opportunities to move gas from Canada into Montana which also provides us an opportunity to look at additional fields located in Canada. We have closed on that on December first of this year and we're now recovering those costs as well as what we estimated to regulate rate of return in our monthly tracker beginning in December of this year. And this is basically the same process that we're using to recover our natural gas acquisition what we are calling Northern Bear Paw, or the NFR acquisition.
So lots of still good opportunity to acquire a natural gas in Montana. We're recovering the cost for those facilities and just aside of our – that our first transaction, that's we executed on, we did go to the commission, and we see if a rate based authorization for that facility.
Unidentified Company Representative
Thank you John, just to reinforce a couple of points on the GAAP side, again these are opportunities to continue to meet our retail customers needs to deal with fuel price risk and electric generation and to deal with depletion. On Thursday I got to participate in a new employee training for the tremendous – before bringing over along with the asset, it was up in Havre Montana, right below the Canadian border, coldest day in Havre since the 1930s, 27 degrees below. So it was a great day that we're talking about gas production. And we all we say maybe 20 or 30 degrees below, but it's a dry 20 below. And I was still impressed by the skill that we're bringing over. A number of other local distribution companies are looking at gas acquisitions [indiscernible] anyone in the country is actually bringing in the physical asset, the ability to operate those assets, and this is one of the areas of several ware distribution, transmission, and supply all work together just extraordinarily well.
On the electric side, my comment on the hydro transaction is there is no older, if you heard me say this number of times, that there is no older form of generating electricity other than perhaps Benjamin Franklin kite. But there is no better form of generation of going forward given the risks that John suggested there really aren't other opportunities to build or acquire hydroelectric generation on this scale certainly in the lower 48. After of the transaction was announced, I got a letter from a former employee who quoted, [Polish Spekel], and Pol was one of the most respected leaders of our [indiscernible] at Montana Power and the letter quoted, Pol is saying, [indiscernible] and run it for a long time, these are facilities that are due diligence determined were in very good shape. And we intend to do just that take very good care of demand, run them for a very-very long time.
One of our great offsets on transmission side is our 8000 miles of electric transmission over 2000 miles of natural gas transmission. One of the big challenges in the electric industry is coordination between electric generation and gas transmission and supply. The Federal Energy Regulatory Commission holds regional workshop science you can go to all kind of conferences on the subject. So there is one of advantage is we're able to do enough a lot of a lot of that in-house in fact we're essentially doing that over the week and looking at how we operated at the Dave Gates Generating Station to maintain the stability of the electric system on the one hand while meeting the needs of our natural gas customers on the other frankly exactly what we're supposed to do.
Mike Cashell is our Vice President of Transmission Gas and Electric. You will see a picture of one of his natural gas group working on an important project right up here. Mike a veteran coming out of the Montana side in entire carrier with NorthWestern Energy and before that Montana Power.
Mike Cashell
Thank you, Bob, and good everyone and thank you for coming. Bob is right we state-wise we built a transmission system reliably and safely, so you can meet the demands of heavy loads and we certainly have in this week both on electric and gas side. Many of our Investor Relations' discussions in previous years from a transmission perspective had focused on regional transmission and those opportunities are changing, so today I'm going to focus on what we do very well and that is provide transmission service to our service territories and that's fundamental for as long as we've been operating.
As Bob touched on a few of the statistics, we got over roughly 7000 miles of electric transmission in Montana and 1300 in South Dakota, natural gas 2000 miles in Montana and 55 in South Dakota. We have a very methodical robust planning process and it's gradually fundamental and Curt Pohl will talk about this as well. In fact, it's so broader in fundamental on both transmission and distribution sites that we take in many of our common areas like engineering and planning, and we've taken those and put them together for a T&D operations, so Curt will probably talk a little bit more about that. But what we've focused on meeting our increasing demand in our service territories as I mentioned, reliably requirements which are becoming more and more challenging.
Regulatory compliance obligations which I will touch on again the coming a big part of our operation and also meeting requirements of our Open Access Transmission Tariff, we are a third regulated transmission entity which means that we provide Open Access to all eligible customers and is actually a pretty big part of our business. The priorities and again Curt will probably emphasize these as well safety number one; reliability above the serve our loads, the ability grow using existing facilities and optimizing those facilities responsive to our customers, and the list goes on; cost effectiveness, effective technologies we are a very advanced transmission system as well in fact we participate in a very advanced process in the web called a synchrophaser process, it's a kind of cutting edge technology bringing data into balancing authority.
We do operate a balancing authority as well as the transmission system which means we got responsibility to ensure that any moment in time our loads and resources for all of our customers including our wholesale customers and our retail customers are completely balanced and that they're within criteria. On the gas side, we follow a very similar process planning for cycles, 5 and 10 year cycles, and we plan a little bit differently on the gas side. On electric side, we're planning for that peak hour or hours like we had over the past weekend. On the gas side, we're planning for peak day and again we have that as fast as we can do in fact subject to check it's probably record flow of natural gas on our natural gas system.
In terms of what is the transmission capital opportunity to look like you can see this is the same slide you have in all the different organizations, so we've got $69 million capital budget on the gas electric side, it represents about 25% of the overall budget on the capital side for the company, many projects going on, the first project there just includes (NYSEARCA:AMPS) project, that's a requirement to provide service to an open access transmission customer. So, it's our largest capital project coming up in 2014 and you can see other projects that I'll talked about our Jack Rabbit - Big Sky project, NERC compliance I'll talk about that little bit, it's a big investment next year and over the following years.
I will talk a little bit about TSIP, our Transmission System Infrastructure Program, part of that is project which we call GTIP, Gas Transmission Infrastructure Program, you can see we're investing there too. Overall, lots of big projects next year but we ground that with our typical routine types of maintenance, $21million in 2014.
To serve our customers widely, we need to take look at our capacity and off the different areas and we got 2 projects underway right now but are really based on that additional liability is need to serve the Big Sky area, It's a growing resort area in South Western Montana and we're converting 69kV systems lined, one of the lines that serve that area to 161kV and we're coupled phases into that project, we received the final approval from [indiscernible] so we actually do some work on four service land and complete that project.
Overall, that project is about our $38 million project over a several years. Our Carbon –Stillwater 100kV project something. Eastern Montana, we're increasing our loads or increasing all customer load near is increasing requiring us to build some new capacity in that facility in that area that is we're in the early stages of that and exciting process. We're going to bringing new 100kV facility into that area and substation work well and over its life which started last year and into 2017, we're going to be investing $40 million. So, significant investment in the southeast and southwest areas are of our service territory in Montana and that's typical of our robust planning process, we're identifying these areas really have future needs and we build that in our CapEx process.
I mentioned Transmission System Infrastructure Project and really this is intended to be enhancive what we already. So, we've got some really strong programs around maintenance for polls breakthrough substations all those kinds of things and on the gas side we have pipeline integrity management as well with our capacity needs there. But we were focusing on is looking into the overall health of our transmission system looking at the infrastructure and as our infrastructure ages what we're going to need to be doing into the future. That's not unlikely the project that we have unveiled several years ago refer to TSIP which I currently talked about and again, since we now have the not only the planning capabilities but the data we're looking at our system and determining in the future what increased investments going to be necessary to maintain the liability on our system.
On the gas side that means moving beyond our basic compliance responsibilities with federal safety regulations and to prioritize upgrades and if necessarily focus on long term customer benefit and really what we want to be there is focused on the areas of highest potential consequences. And in the pipeline integrity managing what you're doing there is you looking at high consequence areas, those areas that if there potential pipeline that look the outcome or the impact might be. So, we're expanding our efforts to look at all areas which would include specifically all class three consequence areas.
On the electric transmission side again, we have strong programs in place but we are systematically looking at our planning and looking at performance of our transmission system including vegetation management, pole replacement, overhead line maintenance, NERC compliance and again I mentioned these as well, capacity, reliability and also technology. On distribution side, Ken Kliewer mentioned technology little bit too but on the transmission side, we've already got pretty smart system and we have more opportunities probably on the distribution side for technology deployment than we do on the transmission side.
It's really important to note that programming scope of the overall TSIP plan is still under development and we are introducing pieces of it into the CapEx budget as we go along but the overall plan is still under development.
One, [indiscernible] just want to touch on a little bit and this is related to some of our requirements that related to compliance activities. In North American Electric Reliability Corporation or NERC which is the overall reliability entity in the United States and our sub-entity in our case is the Western Electricity Coordinating Counsel, issued what's referred in the business words. Basically, it's a strong recommendation for utilities in industry to take look at the conditions on their actual systems compared to the design.
What this really means is, we're having to look at the clearances on our systems and in order to determine if we have any potential clearance issues and as you might gas this is a big opportunity throughout the industry. Many, many utilities are finding up their facilities which were designed decades ago in many cases [indiscernible] issues and there are three areas of criteria that we have to follow, how are you meeting the low priority clearance issues. We have no high priority issues that was on our 500KV system. By the way our transmission system ranges from 50KV to 500KV, so we have no clearance issues on our 500KV system. The next priority is for medium and that's on 230 and 161KV system and we have a plan in place to fix these issues within the next couple of years and you can see there's some high and low estimates for those facilities but where the real impact comes is in the lower voltage bulk electric system facilities that we have and that's a 100KV, so a 100KV and 115KV systems which in many cases we're putting the system originally in our system over a 100 years ago. You can imagine how terrain has changed, use of the facilities have changed, so we [indiscernible] clearance that's just to deal with and we're not unlike any other transmission facility. This is a big issue across the industry. But the point here is that this new regulation we got, an opportunity and an obligation to invest significantly over the next three to four years. We just got this plan approved by the Western Electricity Coordinating Council in Europe, last week in terms of timing and through 2017, we'll be investing at the low end, about $31 million for the [indiscernible] initiative and at the high end around $43 million. So again, grounded in fundamentals, this is the kind of work we've done for centuries, at least decades, on the transmission system and its, what connects the generation to distribution allows our needs to be met on, especially on these very cold days when we made our piece.
Bob Rowe
Thank you, Mike. Well you can see why, certainly it's important to me to have operational needs in each of these three key areas, supply, transmission and distribution. On the distribution side, Curt Pohl up in the NorthWestern Public Service side, you can drive around South Dakota and Nebraska he will point to, I built that, I built that, I built that like we're doing that couple of weeks ago and everything spilt into the doing just fine. Photograph here as you can see that the [indiscernible], see the journeyman who's worked for us, certainly [indiscernible] worked for us in [indiscernible] for 39 years, that's really representative of the kind of employee that Curt has in his part of the company, responsible for a large part of the budget, on-going operations and then our distribution system infrastructure project. And if you think about the complexity of building a several hundred million dollar power plant, I couldn't think of that instead of a plant built over a couple of years in one location. Thinking about something spread over five to seven year across an entire operating system, gas and electric. That's what we're doing with [indiscernible], something we took on voluntarily because it was the right thing to do, it wasn't a mandate, or an order or a compliance issue for us to do it. Curt is heading up that effort along with everything else we have going on in distribution, in energies on a quarterly basis to come in right on plan with earned value better than budget, we had very good support from regulators, the public on this as well, fact we'll be meeting, giving the Montana Commission this case, an update in January on progress on [indiscernible] and other things, [indiscernible] over to Curt.
Curt Pohl
Well, thanks Bob, and thank all of you for coming, first of all I guess, you know let's talk about distribution operations. I do get the privilege to work with a very dedicated workforce, Mike mentioned some of the cold weather that we've been having, it is on days like this where you truly appreciate the line men and the gas men that are out there having to deal with some of the problems, while our system has put up very well, over the past couple of weeks. We've had, we've had a few outages and we've had to deal with some things and there isn't any time more when you appreciate those folks. Culture was mentioned earlier, and one thing that I would say is that you probably won't find, or you'd find more of a difference in our culture today than you have over the last several years, specifically over the last five. And one of the things we have dedicated a lot of focus and a lot of time to, while we haven't lost the engineering focus and we haven't lost the execution focus from the technical aspect, we spent a lot of time over the last few years developing our leadership, developing our employee and have turned a broad focus on safety and you see the results in the performance of the organization. I think that week through when we start talking about execution and nothing is more important where we talked about the execution of our projects that we have before us, because we are doing more work than we probably ever have as an organization. We do serve about 675,000 customers and we do that over a network of about 20,000 miles of electric distribution and about 7,500 miles of gas distribution, but one of the operating philosophies and this is pretty fundamental, Mike mentioned you're grounded in fundamentals but this pretty much says how we operate, we accumulate a lot of data, but we put a lot of time and effort in analyzing that data and looking out longer term as to what that data is trying to tell us. Quite frankly that was the evolvement of the [indiscernible] project, years ago we recognized the need that we've seen a lot of aging infrastructure that was going to come due we could analyse, we understood lifecycles, and we knew that if we didn't get ahead of it as one of my engineers say it would be a problem that would manage us instead of less managing the problem. And so we developed the DSIP problem or DSIP project over a number of years and obviously did a lot of work and communicating what that was about and what that meant from an investment standpoint and how many dollars it was going to take to fulfill that project.
Just to set up the discussion on DSIP one of the things that we do look at in our asset management approach is it's pretty fundamental as well but it's a good way to explain how we talk about this. Obviously we don't want to replace assets well ahead of time and before their time and we don't want to let them run to failure. Obviously for replacement way ahead of time, it costs a lot, and it's prohibitively expensive if we let them run to failure it's pretty basic but obviously we're going to spend a lot of money in reacting to issues as opposed to proactively managing them.
This just represents the capital budget that when managing the distribution. And again if you look at this over the last few years, you would see the increase in capital expenditures and distribution primarily driven by the DSIP project. But other projects as well within distribution primarily when you look at growth and some of the other things that we do with reliability and maintaining the system the DSIP project was developed as a comprehensive approach to be an addition to what we normally do on a maintenance CapEx annually year two to basically go through and address the needs and the issues of aging infrastructure and so forth so I'll get into that in a minute. But just a [few] distribution represents $134 million of the CapEx budget, it is just about half of the CapEx budget for the Company.
So turning our attention to DSIP and I've explained this and I know that a lot of you have heard a lot about DSIP over the years. But it is at a high level as the seven year project it's about $290 million of CapEx over that seven year period, and it's about $90 million in operating expense. Now one thing I will say about the operating expense side is that obviously we are continuing to gather data, we're continuing to evaluate each component of the plan and what it is going to take into the future and already looking at where we would modify if necessary and potentially hopefully decrease the operating expense over time but still meet the objectives of the plan.
The CapEx we would largely believe that it will still be about $290 million of CapEx but just a high level to explain the DSIP project in general the primary goals of the project were to address the issues of aging infrastructure. We're not unlike a lot of utilities [moving] for the lot of infrastructure in, in the 60s and the 70s and basically it's all coming due within the next five to seven years. And so one of the things we've recognized is we wanted to get ahead of it and we wanted to proactively deal with this issue. Primarily we're talking about pool plan, underground table and then some of our -- on the gas side it's some of our larger historic districts on the gas distribution side.
So, essentially the DSIP project helps us build a comprehensive program so that we can address all these issues very proactively. The other thing that DSIP does is it builds a base for the next generation of technology. When I jumped in right out into deploying a ton of smart grid technology a lot of other bells and [whistle], if you will, but one of the things that we are doing is setting our network up so that we've got a strong communication network with all of our substations and able to communicate to various parts of our distribution system so that when the time is right we will be able to develop and deploy technology kind of the system, so primarily that's what the DSIP plan.
I could tell you we're into our first full year production in 2013. We had two years of ramp-in in '11 and '12, we did that with the approval of the accounting order that we received in 2011. Those years went very well but it also gave us the ability to learn a lot about what we were going to experience when we got into our first full year of production which was in this year. And I can't tell you to how pleased I am with the team in terms of how they executed the plan 2013 will come in right on track with what we anticipated. And again that allows us to basically learn from that and then reforecast into the future.
Unidentified Company Representative
I am getting trouble with everybody in work within one Board member for how I introduced this next section but it still matters one of our great Head of our Human Resources committee so as think of a company has a cow and [indiscernible] in front of the cow and the back of the cow and Phil wants to make sure that the front of the cow, the operation gets all the resources that it needs and the back of the cow Brian and me [indiscernible] are doing everything you can to make sure you are supporting the front of the cow.
We'll all the parts of the cow have to work together so now nobody is going to sit next to me at dinner tonight after I said that. But those of us at the back of the cow are very important too. Because we are fully regulated company and focused being utility essentially everything we do goes to a regulatory process of some form, whether it's state commission or a federal commission. All of that ultimately goes up to Pat Corcoran our Vice President for Regulations and Government Affairs.
These are really not jobs that provide necessarily a long career life, you get old fast you got to know your numbers, and you got to [indiscernible] lot of facts and figures, you are going to be able to work with everyone internally on operational side, finance and legal have to be best friends and you have to have complete credibility of all the regulators.
Somehow or rather Pat has managed to do all that very, very well for many years. All of the initiatives we have described ultimately go through that regulatory process led by Pat and his team.
Pat Corcoran
Thanks Bob. Let me put some of this stuff together for you just real quick from a regulatory standpoint, what you have heard today is we're a regulated utility and we want to do that regulated by all our respective commissions. We have provided an essential service to all of our customers, you have heard about that today and as we deal with the weather situation and the [indiscernible] we do, essential service a critical component of the economic wellbeing of our service territories customers.
And something you have heard pretty steadily today as we provide, expected to provide safe and reliable and affordable service, which by the way that same standard is the primary regulatory standard as they review provide safe reliable and affordable service.
Next think you have heard today is we're capital intensive utility, for the things we [indiscernible] because we're providing long term services to our customers and we make long term decisions and we make long term investments. And so how do you put that together from a regulatory standpoint?
Well it's a balancing act, the utility and the regulator share the same burden, the balance entrance of our customers our shareholders our employees and all of our stakeholders and in order to get that right we have to work together to do that. And so I think that's foundational process NorthWestern is the way we do that. We work hard to be as open and transparent as we can as a company here today as [indiscernible] before the regulators.
We spend a lot of time before educating them on a variety of subjects, and we have done that quite regularly over there, so that's four or five years, Bob just mentioned another one of those that are coming up. And the importance of that is we want a commission and all of our stakeholders to know what we're doing, why we're doing it and what's all about, no surprises open transparent.
So if that is a backdrop let me just give you a quick update on some of our regulatory activities. Some of the major ones we talked [indiscernible] bottom today in some respect already. But the one I want to talk is just regular old electric and natural gas generate filings. We evaluate those actually on an annual basis; the first part is we look at the overall cost of service for all the utility services we provide in order to determine whether it makes sense to make a rig filing in our various regulatory jurisdictions electric or natural gas.
And that's looking at the overall cost of service for our delivered services and our supply services. So it's not we don't ignore those things but when we make filings it makes sense. Also with respect of what I call regulatory capital, that's the big filing coming up with the hydros before the Montana of Public Service Commission.
So I mean we have limited resources they have limited resources, that's part of the balancing act and being respectful of those kinds of things as well. John talked about and others talked about the hydroelectric filing but in Montana somewhat unique and we have a stature that allows us to go to the commission [indiscernible] acquiring -- that approval. So the filing we're going to make as it relates to hydros once we sign the purchase and sale agreement we agreed to make the filing within 90 days, that 90 days is December 24th. We're going to be going in with three components with the filings thus asking the commission to replace the hydro assets for $900 million, approved the overall generation cost of services and all the associated cost return on return out -- expenses and lives put those cost into our supply rates and then approve in the associated financing requirements we have under Montana and related to that.
So that's the big ticket item for us, that we're focused clearly on and our primary item at this point in time. The federal energy regulatory commission side of this, as there are also some filings related to the transaction there in particular section 203 filings which is related to first approval of the transaction itself 205 filing which relates to market pace straight authority because of the additional hydro. And then of course there is a hydro license transfer filing, when you transfer the associated license associated with that. John has already talked about the natural gas acquisitions we do in Montana. I am not going to spend too much more time on those. The key part of those is after we have acquired those assets, we're able to put them in rights on an interim basis immediately. That gas is gas we have been taking up to this point and recovering as market based purchases in our electricity supply tracker. We are putting in rates on an interim basis under or on earnings based cost basis subject to the subsequent filing with the commission, or it's a [indiscernible] those assets.
And just very quickly there are other filings we make on an annual basis because we have a number of annual trackers and other filings. In Montana, you probably hear a lot about qualifying facility or QF filings. We make a number of those because there is a lot of that activity on Montana. It's primarily updating the rates associated with the latest cost for those types of assets. In Montana actually in South Dakota and Montana and Nebraska we filed our supply trackers for both our electric utility and gas utility services. In Montana we just had to raise an order from electric supply standpoint, you know where we dealt the Dave Gates
Generation Station average cost, Demand Side Management cost, and loss revenues.
And those were issues that come up with, you know we continued to work on loss revenues. For example as the one we're – we're going to be [indiscernible] commission's questioning the appropriateness of loss revenues going forward. We're proactive, we're going to pursue that and make that correct to the filings to deal with that issue going forward. We believe it is appropriate as a public utility required to invest in Demand Side Management under Montana law. Demand Side Management resources one of the lowest cost electrical units you can buy, but have to get the public policy right associated with that. So we're focused on those kinds of things.
The Montana property tax trackers, [indiscernible], in Montana we are around $90 million plus of property taxes every year. We file annual tracker that's coming up to you shortly and you'll be rating about that. And then John mentioned, well with every other year in Montana we file an electric resource procurement plan, and co-incidentally and we're preparing that filing and basically [indiscernible] same time as the hydro acquisition filing because those two are basically both doing the same thing. The plan was quickly modified to include adding the hydro into the plan and that analysis is important to us in supporting the hydro transaction. So we were part of the utility. We were serious about the things we do. And I think we have a clear and focused regulatory agenda. By the way we have been – the things we have done are pretty successful to this time. Thanks.
Unidentified Company Representative
But as per to relationship [indiscernible] his job, I am not saying, but he might have something to do with sausage. The next member of our team is our General Counsel Heather Grahame. Before joining as Chief Advocate before that they created the state regulatory practice at Dorsey. We lured her to work for a company and she has been successful in persuading, and a number of other people can join as well because a great legal [indiscernible] in Canada, moving to Montana because it was warmer than where she had been previously and which was [indiscernible] where she and her family [indiscernible]; so Heather?
Heather Grahame
Yes, thank you very much. It is a real pleasure to be here and this may be the first time certainly for some, I've ever spoken to analyst and maybe first general counsel has for this company. I have two points, that I would like you to consider as you think about NorthWestern Energy. The first is the fact that we have been able to significantly reduce the number of legal proceedings and litigation reported in our SEC filings. If you go back and you look at our 2008 and 2009 annual report you will see that the number of litigation matters or legal proceeding is 9 in 2008 and 9 or so in 2009. And I can tell you how happy NorthWestern is to say that that number was reduced in 2012 in our annual reporting to 2 and in our most recent 10-Q filed this past October it is down to 1 and that's the one that you see on the PowerPoint. It is the Sierra Club litigation against the owners and the operator of Colstrip. Now there are many reasons for that significant reduction.
My personal view is, some of those reasons are, this company's absolute commitment to the highest corporate governance standards to principles of compliance as well as to safety; and as you have heard today that commitment is from the board, executive team, to all of the employees. And my second point today is to just very briefly talk about our legal department. We've restructured ourselves. We are very small by company standards; we have six lawyers, one paralegal and another one coming on board. Bu the point is we restructured our self to provide the maximum value for our customers, our shareholders and what we call our internal clients. Only one third of our legal department is committed internal to state regulatory work and that of course because we're completely rate based rate of return company. And so when we go in front of the Montana PUC or the South Dakota PUC, it's with our own word, it's not with outside counsel and that has the benefit of not only reducing cost but also the ability very-very strong ties with our internal clients. We have calculated that if that worked with outside counsel, it would literally be millions of dollars saving, that is one of the significant changes we've made within the legal department.
Most of the reference of lawyers and legal departments are focused on compliance whether it's FEC Compliance which, Tim Olson, our Corporate secretary handle whether it's referred compliance which our [indiscernible] compliance officer handle that's what we're committed to do when we think it provides most value again for our shareholders, our internal customers as well as our external customers and with that thank you very much.
Bob Rowe
The next member of our team is Bobbi Schroeppel and she has Customer Care Corporate Communications and Human Resources. We wanted to shrink our executive team a number of years ago and Bobbie consistently volunteered for one more job, one more job, one I think I want to brag on here and there is a lot of brag on initiatives areas that we brought new customer information just the same time another utilities we're doing a lot of candidate suffering. We did I think better with guidance from the Board that was under Bobbi's leadership actually Brian heading up Business Technology better, cheaper, and certainly conferred what was happening with Affordable Care Act webpage pretty during their job.
We actually got a letter from a customer just a couple of days ago congratulating us on something that most customers don't really recognize. Bobbi?
Bobbi Schroeppel
Thanks you, Bob. Thank you for coming this afternoon. Firstly, Heather Grahame [indiscernible] going to touch on of the customer information system. Most of you are utility customers probably all of you don't think of us, the system that is generating the bill that you get everyone or that takes all of your interactions if you to call utility but that is the customer information system, we started about four years ago to merge two systems together and upgrade to a new system, they went live on Labor Day, we can – and I can tell you that well that perfect process has been remarkably successful, and we did for about 25% of the cost of some of our peers [indiscernible] on the customer information system and to give an idea, it's a very easy for utility outside to spend on some $50 to $75 million on these types of systems, and we didn't think that that was – so that's why we spend our capital but we're very happy with the system that we have in place.
Customer satisfaction we measured in many ways just [indiscernible] JD Tower, it's not the only way that we measured it, but Brian was saying it wasn't many years, we had to go to banks page of S&P[indiscernible] to find credit rating. Brian right [indiscernible] you had to go the back page of JD Powers to find our cost on energy, but we were down here at the bottom and I am happy to that today we're above average, and we're moving into the first quartile in our peer group, so things that's important as analysts and potential investors or current investors and Steve Adik as mentioned the relationship between financial performance and corporation and kind of the overall corporate image and stakeholder approach.
And then the last thing I'll touch on is the workforce within the utility industry, it's an industry with a lot of 10 years going to have been just starting to see the beginning of the tip of iceberg probably little over the next 7 to 10 years, the 30% to 40% to 50% of the workforce of an average utility retire we're definitely seeing retirement trends uptick although we still have a lot of employees that are choosing to work well at the age of 60, but we are having [indiscernible] high quality employees for finding out that even the millennium for people say that they don't and they just want move around we're finding that there is a plenty of them out there that want to have a high value [indiscernible] rewarding job, but they want stability that company like NorthWestern offers and of course with we just recently crossed over a market on [indiscernible] 30% to 35% of our employees have actually been with the company for last 25 years, and the other big group of course has been within the company for over than 35 years or 25 years probably.
So with that I will turn it back to Bob.
Bob Rowe
Next Kendall Kliewer, our Controller. Kendall gets a tremendous amount of the credit for the high scores that we do get on corporate governance because our disclosures are so accurate. The Disclosures Committee that Kendall shares, I think is a model of how [indiscernible] effort hard to operate. Number of years ago, I asked Kendall who takeover benefits as well that's a pretty challenging position in a company like that and we're able to manage benefit cost but actually I think provided overall better package of benefits for our employees year-over-year, Kendall?
Kendall Kliewer
Thanks Bob. Not only that Bob said the best of the administrative [indiscernible] but he also gave me 45 minutes to talk about the accounting process, go rush for the door, now just very quickly Bob pointed out our timely transparent financial statements, we made a decision several years ago to push up the timing when I started with the company little over 10 years ago, NorthWestern was delinquent in their filing, filed [indiscernible] for their 10-K one of the bankruptcy certainly after that and since that time we've been rebuilding company as Brian said, made an conscious decision to push up timing of our filings and now we're one of the faster certainly one of the fastest certainly one fasted utility filers in the country, we filed our 10-K usually by no later than February 15th, this year it's going to be little bit later because of scheduling complex for the Board meetings but I think February 18th is our intense and we filed our 10-Qs right around the between and 20th and 25th of the month following close.
And we do that really to so that rest management doesn't have to focus on store that numbers we can see if that are good based on what we've done historically and using that to forecast and make changes going forward, more time we've turned them better and then on benefits what Bob mentioned, we've been able to control cost sales that's not an easy thing to do obviously you control cost usually as cutting benefit and we have introduced some of that over the years but we try to, we've done lot of bench marking along that we've seen consistent and very competitive with our peers within the utility industry, some of the things we've done is closed our pension plan to new entering, we're very mindful of our pension plan right now, we have been towards the top of our peer group in terms of funded status, we probably slip there little bit over this year because we've been more conservative on our asset allocation and on all of our assumptions related to our pension plans. So, we may -- when Bob shows the [indiscernible] slide at the end of shareholder meeting and you see slip down of few matches. But whether I can surveys and we are very well funded on our pension plan. And the other thing I really focused on is our medical class, we implemented a wellness program, we're now in third year now and we are very focused on how we can control cost also taking new into account the impacts of the affordable care acts. So, that's all I have.
Unidentified Company Representative
But we've about three minutes in New York time now, I didn't think it was important to give all [indiscernible] opportunity you hear from and meet our entire executive team again. Are you doing this for long time or what you are new to this, we're happy to answer questions for as long as you like to stay and it's a rule of engagement, use the microphone because this is being recorded and if you could identify who you are and who you are with.
Unidentified Company Representative
[Indiscernible] I think when tough questions asked and we are executive team here.
Question-and-Answer Session
Unidentified Analyst
You talked little bit about the reserve margin impacts with [indiscernible] and I just wanted to you to give little bit more, what is the opportunity what's size of it?
Unidentified Company Representative
As I mentioned, we're looking somewhere 30 to 60 megawatts of additional 18 generation in the timeframe between 2017 and 2023 to 2025.
Unidentified Analyst
There is been talk about the energy and balance market in the Western [indiscernible] being expanded just want to know how that might impact NorthWestern, what you guys thinking about?
Unidentified Company Representative
We're staying active, staying close to the process on the utility side, now we're participating the group in the west and particularly in the northwest but includes VPA, other investor owned utilities and at this point funding the next step, the question ultimately is whether or not there is value to us and other utilities that exceed the cost, there are some challenges because of the mixture investor owns and public. [Indiscernible] transmission project.
Unidentified Analyst
Could you just elaborate on your earlier comments on the hydroelectricity base and the dynamic annual CapEx and depreciation?
Unidentified Company Representative
We have a slide that we'll be providing in our regulatory filing in a couple of weeks and it shows declining in real terms the cost for megawatt hour on the hydro assets and that's a reflection that the depreciation over the time period of the evaluation exceeds the amount of investment that we forecast necessary that's why we think it will be a great contributor to stable our interest rate.
Unidentified Company Representative
Just to add briefly, I look it have a lot of comfort with level of visibility into the assets and their state from I think multi due diligence obviously take a review and data we have, site inspection, taking advantage of the expertise we have in house as well as the outside numbers of our team. So, if really know about this plans and the exciting opportunity then to look at them long term and really do some finding around them.
Unidentified Analyst
Is there technically an opportunity to reclassify the [indiscernible] for portion of the David Gates station to the retail customer.
Well I want to be very careful of not speculating what might happen at DGGS depending on a per customer, our view still is that plant was designed and built [indiscernible] to meet our first obligations for reliability and integration, that's how we're operating it, no questions about the prudence of the decision, no questions about the investment and we're very disappointed to not have an acceptable court decision at this point. Certainly, we're, we will, when we see a decision eventually from the commission, we'll have to look at that and evaluate it. John or Mike, either one of you have anything else?
Unidentified company representative
The only thing I would add is that with the addition of the hydro assets, will allow us quite a bit of ability to optimize our entire portfolio using the full range of generation assets that we have and certainly, regardless of the [indiscernible] outcome, Dave Gates is part of our portfolio and we'll be looking at enhancements of all different assets.
Unidentified analyst
Okay and one last question, the effective tax rate in 2014, what will the trend look like post '14 until your next general rate case and all gets wrapped up in the call for service.
Unidentified company representative
Yes Bryan, it's a good question, we've mentioned some time ago that we expected our tax rate over time to increase, matter of fact we had said upwards of 20% by 2017, with the hydro transaction in the fold we expect that could even exceed 20%, beyond that 2017 and we'd like to share more on that if in fact the hydro transaction closes.
Unidentified analyst
Just on the David Gates, any idea of timing, from the start or any conversations you've had or anything you can share with us, in like two years.
Unidentified company representative
I hate the [indiscernible] start with that question of we say we honestly don't know, actually there's a timeline in the appendix to the material which gives you all the key milestones from plant design to the Montana commission's initial decision, final decision and then now over a year since the [indiscernible] ALJ issued her decision but it truly is a black box at this time and in terms of conversion, no, we're not allowed to have ex parte conversations at the commissioner level and a very broad comment and said with complete respect for the Federal Energy Regulatory Commission, this is an instance why I actually believe federal regulators ought to look to some of the more effective mechanisms used at the state level to manage risk to manage, …., I think that in this case a better job could be done.
Unidentified analyst
And should you lose the case and have the opportunity to possibly put it into your retail rate base, what type of dollar investment are we're talking about.
Unidentified company representative
And again I want to be very careful…
Unidentified analyst
That I understand but I have to say, yep, if that was the case how much would that add to, possible include the [indiscernible]...
Unidentified company representative
I am taking this as a hypothetical question, it's the 80-20 allocation, Mike you want to walk through the formula.
Unidentified company representative
Again completely hypothetically, essentially the initial order would suggest that the 20% of the cost of the facility that we allocated to FERC customers, we can only recover 4%, so the gap is 16% of the overall cost.
Unidentified analyst
Which is how much, I mean millions of dollars?
Unidentified company representative
It was a $180 million investment to begin with.
Unidentified company representative
One last comment there, the Montana commission did the right thing in how it processed our application both before construction and afterwards and secondly the Montana Commission participated in the full FERC proceeding, so we're very pleased with the approach the Montana Commission's taken to this.
Unidentified analyst
Hi, Greg [indiscernible], I just wanted to get a little more detail on the 4-6% growth rate, is that pro forma for the transaction growing out of the higher rate base, or is there some [indiscernible] into the 4-6%
Unidentified company representative
I think, it is a long term growth rate and as we mentioned from a historic standpoint, we had been growing at 10%, it's our view we're looking at that 7-10% total return. So in fact before the hydro transaction we feel very comfortable with 4-6 earning being around at that level. Post hydro from that as a base it will be harder to grow at 4-6% return and we understand that. We will continue with strong flow from the hydro assets, incremental to the cash we had today, look at opportunity, but more importantly we're going to focus on overall 7-10% total returns, and again remember we pay only 60% pay out today, we have an opportunity within our 60-70% pay out to move up within that to win, try to provide at least a 7% to 10% return on a going forward basis regardless of the transaction.
Unidentified analyst
It's just a follow up on that, the 4% to 6% when you say it's harder if you think it would be less achievable I mean it would be unachievable and then just I mean how should we think I mean it sounds like it was less achievable and you weren't able to grow that fast you push up the dividend more to compensate shareholders. If you could just elaborate a little bit, if I'm understanding it correctly or?
Unidentified Company Representative
A lot of its math, when we went from 1 billion of rate base to 2 billion, we grew a 100% by going from 2 billion to 3 billion, we've grown 50%. And so some of that is from a math perspective you have to take that in the consideration I mean just having a higher base to try and grow your earnings base if now $3 billion rate base versus $2 billion, it will be higher from an earnings perspective. But again I think the main thing we're going to try and do as you pointed out the backend of that, we will look at both dividend policy and other opportunities to utilize our cash flow on a going forward basis to provide those types of returns.
Unidentified Analyst
Okay, so you're now at this point going to say what the growth rate would be post the hydro transaction, is that…
Unidentified Company Representative
What I am saying is that we're focusing on the total return of 7% to 10% with or without the transaction.
Unidentified Analyst
Okay. Just follow up here on a couple of quick things. With respect to the depreciable life of the hydro assets, just what is that? I mean, how should we think about that? Is it the FERC at least 20-40 license? How should we think about that? And then the 4.2% increase also -- rate increase. Over what -- in reference to what it being referenced to the historical number just if you could do the whole [more] flavor on that?
Unidentified Company Representative
Yes, I'll take the first one. That's [four] year depreciable life from a book perspective and I'll let Bob take the next one.
Bob Rowe
[Stuart] we're trying to be very precise in our disclosure around price impact to customers. And what we're looking at is a comparison between the rates essentially this fall or [indiscernible] I should say between total build this fall and total build immediate after an approval. Pat anything to add to that.
Pat Corcoran
No that's great.
Unidentified Analyst
Okay, and then just on the gas side, it sounded -- first of all just what the BD&A rates should be I mean if you got that know the [GAAP] acquisitions how much of that rate base decrease. And then also so just [indiscernible] mentioned but there is a cost savings component of those the customers get better deal at least it sounded like an [slide] quarter one that you could save customers' actual money in doing this. And just wondering if you could just elaborate a little bit more on that? And just in general the regulatory desire for stability here? I mean clearly I guess Montana District with the regulation that work well and they're more willing to do these other things. I'm just wondering how farther we think they would go sort of in this I mean [indiscernible] has got similar people this is not very common that you see this [GAAP] rate basing thing…
Bob Rowe
Honestly, I'm not aware of another local distribution company that is actually rate basing the operation of the whole gas assets the way we are this is something that Montana Power did uniquely and did very well as a rule of thumb they were responsible for about 50% of their own gas production and that was our starting point really just from a comfort perspective. I think most regulators around the country would put some value on stability as well as price and the chart at the bottom you mentioned page 41 the chart at the bottom the page there is a nice [trouble] highlighted and there is the blue bar at the bottom shows very stable T&A and storage costs and then the red at the top is what I've always referred to is the supply rollercoaster. And there is value in flattening out that rollercoaster particularly if you can like to say get off the rollercoaster car as its passing the station at a relatively low point. John?
John Hines
Just a couple of points; one, when we look at these transactions we compare it to the market alternative and at that point in time each of the three transactions to-date has a lower long term of life cost for unit than the market. The other point here is that you do see a decline but you're also seeing there is the overall market price of gas going down and influencing the price as well. Since we've made some of the transaction – actually the first transaction market prices have actually gone down below that. So what it's doing it's contributing to long term stability.
Unidentified Analyst
Okay, and just the DDA, what is the decline in those assets year-over-year as of the fleet, is that hitting rate base cycle?
John Hines
I don't have it as far as direct linkage to rate base I'm just talking about from a physical perspective it's around an 8%, I don't know what anyone else says.
Unidentified Analyst
Thank you all again, you're on your kind of journey. Very appreciate you, you staying with this [indiscernible] shorter investments just have a simple question solved but I want to thank you for being very [indiscernible] to our investors' capital this goes to the management and the Board as well. Just on time line I think this was in past presentation I know you have to file at December 24th, are there any deadlines that we should be aware of in terms of the commission's response and anything to follow-up? And then another one is on that [indiscernible] south, could you just explain again how that goes into your earnings for 2013 and how come there is actual income since it's followed through the charter?
Unidentified Company Representative
With regard to the time line associated with making these hydro filing once we make that filing the commission has nine months to process that case by statute within there, there is a 45 day period that have to go through to make sure that the filing is in compliance, has always been you the appropriate contents of that kind of a filing and so they'll follow the procedural schedule along that line that will result in a final order within that time period, to clarify.
Unidentified Company Representative
That would show definitely in 2014 net income since its going through the tracker as of what date it goes into our --
Unidentified Company Representative
[Indescribable] transaction it goes into right effect of starting December 1st on an interim basis and so it will be in rates from that point going forward like the other two acquisitions and in the case of the last two it will make a general rate filing to actually include it in the rate base on a formal basis.
Unidentified Analyst
And just a last thing on a nine months filing or response, is this definite nine months or then you have an appeal process and I think you've said you closed the transaction depending on the outcome. I don't know how you truly think about that. If you don't get everything approved in the rate base and some of it is a goodwill what happens then?
Unidentified Company Representative
The commission process [indiscernible] final order following the procedure, you have an opportunity if you don't like the order to file a motion as per your consideration which the commission can act upon. Of course after that if you are not satisfied with mostly for reconsideration can take it to district court but the fact of matter at that point is whether the assets or the transaction will be available going forward because per the purchase in [indiscernible] will get to the point for you to party perhaps to make a decision what to do if you are going forward as prescribed in the PSA but we expect that order to fall out within that time period as it relates to the transaction.
Unidentified Company Representative
I have one quick question on back to the gas reserves. A return of return on our falling through the tracker and we've worked with commission and they allowed that to happen. The thought process is when [indiscernible] was prudent talk about $5 gas that went into rate base at that level, so the expectation was that these two later transactions that were kind of $4 type gas that we set a precedent with that transaction, so both parties we and the commission and the MCC as long as we are able to -- well three parties, able to get comfortable that we can meet certain criteria on a stipulation will allow us to flow that through the tracker. Now we're returning the return of a return on as well.
Unidentified Company Representative
Generally what I would say is that the commission in south have given us pretty strong guidance to continue to make these transactions. We quickly learned that the business is going out to make the gas transactions the acquisitions was different from building or buying an electric generator. We needed a different kind of process. We have that and as John described, I think that's an on-going part of what we'll be doing from a regulatory perspective I think there is a pretty high degree of comfort again provided we stay within the guidelines that the commission has given us and that John described, we've been doing that. On the electric side as is so often the case, all parts of the company are pulling together to provide a very detailed filings of the commission, we believe will be very compelling. We want them, we expect that they will take a very thorough look at it, but certainly we think we're putting forward something that does really do the right thing by all of those stakeholders that I described at the start this is a very-very good long term proposition for customers at a price that was robustly reached the process [at the time] would reach the good price for the seller for [rolling] seller and the purchaser to manage them back for customers. Any other questions?
Unidentified Analyst
Thanks Bob. First, and follow the Board I'd like to also like to go with the [indiscernible] said is we think you're one of the best management teams in the business and [CR]. Cow analogy probably like [Slemania], I want to let you know that.
Bob Rowe
I was I thought you might be going towards the Wendy [indiscernible].
Unidentified Analyst
As an equity investor you delivered for shareholders year-after-year many of us are going to be sitting waiting I think to some extent throughout this transaction approval. And one of the questions I wanted to get out of the way is what you do to equity financing as part of the permanent financing? Is there any consideration to upsize the deal rather than the street, say 50-50 debt equity split because you do have so much growth? You can recharge the balance sheet; you've done the gas acquisitions maybe there is more to come. So is there any thought of using that transaction and tough size and recharge your balance sheet?
Bob Rowe
Good question Peter. No, our plan is we've been very transparent what our plans are is up to 400 million of equity. And the thought process is yes we have growth that's in front of us. We have very-very strong cash flow you saw free cash flow that we've demonstrated in the past. We expect that to improve at the hydro transaction. And so for us to kind of load out on a going forward basis, just not only do business. And I think our plan is, by the way talking about things that are going on next schedule, we don't get ahead of our schedules to talk about projects. We don't feel very comfortable to put on that schedule and so either do we from a capital perspective. And so we are going to look at financing that hydro transaction only with the capital we raise for that transaction.
Unidentified Analyst
Thank you. And as you make the filings in the next several deals, I might have missed this, the actual gas price assumption that you made and will there be an analysis around the sensitivity of the gas prices. In other words, let's assume $4 in 9x gas and you know if that were to escalate over time to 5 or 6; do you impute a higher value to the hydro assets? And is that quarter filed?
Bob Rowe
Would you say a little bit about the modeling?
Unidentified Company Representative
Sure. We have a substantial amount of [indiscernible] with the commission on how we analyse transactions and what use as the base. At the point in time we make the decision. So we've used a model back on June 7th of this year. We made the final offer on -- we sent the offer letter on July 1, I believe. And so that's the basis by which the computation and the comparison is made and we at that point in time we did do an evaluation on the forward carriers based upon that date and that will part of our testimony.
Unidentified Analyst
What was increase [indiscernible?]
Unidentified Company Representative
I don't have at the top -- actually you mean the electric price, not the – the gas price that drove the electric price. I don't have it in front of me right now. But on a standalone resource comparison basis the hydro assets was a cheaper alternative than the market alternative and the combined cycle alternative that we compared with.
Unidentified Analyst
Okay, thank you, and maybe lastly on the Dave Gates situation. If you were not satisfied with the solution for, could that be the next litigation maybe for our regulatory people out for General Counsel? Would that be added to the list of litigation things like you have great stand in the [indiscernible] and recognizing the wholesale portion of that facility. So, maybe take us through the time, you know without knowing that Dave refer position, can you take us through what might be your thought process around perhaps a negative outcome.
Bob Rowe
I will ask Heather to speak to that. But I think our assumption is that the decision that we disagree with we are certainly prepared to litigate and that would be then the second case in our list. Heather, you can give more insight, and it is very tough to describe a response in the abstract without seeing a decision.
Heather Grahame
Yes. I agree with Bob. It really depends on what the decision says. And we will just have to evaluate it at that time.
Unidentified Analyst
Just back to previous question on the hydro class natural gas value, just understand though obviously even you paid a price, that's what it's going to be based, your filing will be based on the price or kind of value that change and go higher or lower, if the price of natural gas goes higher or lower?
Bob Rowe
No, our filing is based on the price that we negotiate. Our proposal was to approve that and to include that in rate basis.
Unidentified Analyst
The previous point was more towards the attractiveness of the acquisition.
Bob Rowe
That's all [indiscernible] And again going back to that point we've discussed that and number of its – today we find it incredibly compelling in terms of the way that it fits with our system, managing fuel price risk, managing environmental adverse which we all know is increasing, and the simple fact that there is no other set of resource of this size located in our region that could possibly fill that gap. So we are very pleased with the resources that we have.
Seems like you are running out of energy and we are running out of answers. Thank you very-very much for sending lot of [indiscernible] we really do appreciate your interest.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.com. Thank you!