NorthWestern Corporation
Q4 2015 Earnings Call Transcript

Published: 12 Feb 2016

[Operator:]

Good day, and welcome to the NorthWestern Corporation Year End 2015 Financial Results Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Travis Meyer. Please go ahead, sir.

[Travis Meyer:]

Thank you, Jessica. Good afternoon and thank you for joining NorthWestern Corporation’s financial results conference call and webcast for the year ended December 31, 2015. NorthWestern’s results have been released and the release is available on our website at northwesternenergy.com. We also released our 10-K pre-market this morning. On the call with us today are Bob Rowe, President and Chief Executive Officer and Brian Bird, Vice President and Chief Financial Officer. We also have several other members of the management team with us in the room to address your questions today if necessary. Before I turn the call over for us to begin, please note that the company’s press release, this presentation, comments by presenters and responses to your questions may contain forward-looking statements. As such, I will remind you of our Safe Harbor language. During the course of this presentation, there will be forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often address our expected future business and financial performance and often contain words such as expects, anticipates, intends, plans, believes, seeks, or will. The information in this presentation is based upon our current expectations of the date hereof, unless otherwise noted. Our actual future business and financial performance may differ materially and adversely from our expectations expressed in any forward-looking statements. We undertake no obligation to revise or publicly update our forward-looking statements or this presentation for any reason. Although our expectations and beliefs are based on reasonable assumptions, actual results may differ materially. Factors that may affect our results are listed in certain of our press releases and disclosed in the company’s Form 10-K and 10-Q, along with other public filings with the SEC. Following our presentation, those who are joining us by teleconference will be able to ask questions. The archived replay of today’s webcast will be available beginning at 6

[Bob Rowe:]

Thank you, Travis. Up until the call started, Travis was referring to Brian and me as his minions, so you can ask him later what that was all about. I'll start with just a quick summary of some activities, hand it off to Brian for the in-depth financial report and then come back and provide some more color on other things going on. So some highlights, first of all, 2015 net income improved by 30.5 million, compared to 2014. That improvement was due primarily to a full year of hydro operations and an insurance recovery received in 2015. But this was partially offset by the inclusion of an income tax benefit in our 2014 results due to the release of what had been previously unrecognized tax benefits and warm weather, which produced our margins in 2015. We had $3.17 in diluted EPS in 2015, that’s compared to $2.99 in 2014 or a 6% improvement. Meanwhile, non-GAAP adjusted EPS of $3.15 was a 17.5% improvement over 2014 non-GAAP adjusted EPS of $2.68 and within the 2015 EPS, therefore within the 2015 EPS guidance range of $3.10 to $3.25. In October, the South Dakota Public Utilities Commission approved the settlement that we had reached with the PUC staff and interveners providing for an increase in base rates of approximately $20.2 million. That was based on our overall rate of return of 7.24%. And in addition, the settlement allows us to collect approximately $9 million annually related to the Beethoven wind project, which we acquired in September of 2015. At our just concluded meeting, the board approved a 4.2% increase in our quarterly stock dividend, $0.50 per share is payable on March 31 of 2016. Brian, off to you.

[Brian Bird:]

Thanks, Bob. On page 5, summary financial results. First and foremost, as Bob pointed out earlier, net income was 151.2 million versus 120.7 million in 2014. That's a $30.5 million increase or a 25% increase on diluted EPS $3.17 versus $2.99 or an $0.18 improvement and 6% improvement as well. That's at a very high level. Moving on to gross margin on page 6, basically, two different stories. Our electric business did extremely well and offset by a warmer weather impact at our gas business, but at a high level, gross margin was up 119.1 million or 16.5%. On the electric side, margin was up 133.7 or approximately 25% and on the electric side that was primarily driven by Hydro operation, 135 million of improved margin there. In addition to that, we had South Dakota electric rate increase that was offset to a degree by electric QF adjustments and lower electric retail volumes during the year. On the gas side, as I mentioned, gas was actually -- margin was down 14.6 million or 7.6%. That was primarily driven by natural gas retail volumes being down substantially about 10.8 million there and also our gas production rates and deferral were impacted as well. Moving forward, thinking -- regarding weather, 2015 weather, just asking about that as a whole, I think people know that our business, we have variability if you will in our earnings, primarily in the first and fourth quarter, that’s driven a lot by our gas business and what happens with heating degree days, and on this chart, you can see from a heating degree day perspective, we were quite a bit warmer versus ‘14 and also quite a bit warmer versus historic average. As you may know that we impact move from GAAP earnings to non-GAAP earnings, making adjustment and we did add back for the year $0.17 as a result of that warmer weather over the year and that broke out $0.09 in the first quarter, $0.06 in the fourth quarter and even we have some heating degree days and of course in the second quarter, that also had a $0.02 impact there to equate to the $0.17. Just a little more color there. You may also notice that we did have a bit warmer summer, but that had very little impact on our business, and I think if you look at the amount of heating degree days we have versus cooling degree days in Montana, we have 19 times more heating degree days than cooling degree days and nine times more in South Jakarta. So certainly our heating load has a significant impact on our business and thus warmer weather also has a significant impact on our margin. With that, I'm going to move forward to operating expenses. The good news here from an operating expense standpoint, even though operating expenses were up as a whole, 31.3 million, that was only a 5.8% increase and again compare that to the 16t% increase in margin, one of the reasons for the lower increase for expenses is that the operating, general and administrative expense line item actually, that line-item, expenses were actually down. I want to really drill that as Bob mentioned earlier that the insurance recovery is one of those items, nearly 21 million, but also we had Hydro transaction costs in 2014 that we didn't incur in 2015 and as a result of lower share price scenario basis, we have lower non-employee directors deferred comp that reduced our operating, general and administrative expenses, but I think as everyone knows, that item has also offset in other income. Those favorable variances were offset to a great degree by Hydro operations expenses, up 33.2 on a year-over-year basis and we did have higher employee benefit compensation costs, primarily on medical benefits. If you take those two groupings, those favorable items I talked about, approximately 35 million of the benefit and then the Hydro and the employee benefit, that's about 37 million detriments. Net-net, expenses would have went up about 2 million, just taking into those into consideration. So these other items you mentioned equate to approximately 10 million. I just ultimately lump that in the category of favorable cost control. I think the company did a nice job of understanding the impacts of weather, really starting in the first quarter, work very hard during the year to manage its cost structure. So net-net, operating, general and administrative expenses were down 8.4 million or down 2.7%. Property taxes, depreciation and depletion, however, they were up 18.8 million and 20.9 million respectively, but also approximately 16% up in each of those categories, again in line with what margin did for the year. Moving forward to operating income, taking those factors into consideration and talking about margin expense. Operating income was actually up 87.8 million, just over 49%. Below that, interest expense increased by 14.4 million. Nearly all of that attributed to hydro incremental -- as a result of the hydro transaction. Other income actually was down 2.6 million, primarily driven by as I talked about the deferred non-employee directors deferred comp adjustment, that's where it’s offset in expenses and that was partially offset by higher AFUDC on a year-over-year basis. That leads us to income before taxes of 70.8 million or 64% on a year-over-year basis and then lastly talking about income taxes, income taxes are $40 million higher on a year-over-year basis and I really would love those really into two buckets. We did a higher pre-tax income on a year-over-year basis that really drives about 25 million of that $40 million variance. So we also had -- in last year, we had prior tax adjustments that were favorable to us and those equated to about approximately 18 million. So those two represent the lion’s share of those variances. So our tax rate in 2015, 16.6% versus in 2014 a negative 9.3%, or a 9.3% benefit in that year. All in all, as we mentioned earlier, net income up 30.5 million with a 25% increase on a year-over-year basis. Moving onto the balance sheet, on page 10, very quickly, nice improvement in PP&E, up 8% over 2014, primarily driven by our acquisition of the Beethoven wind project and other investments and our system improved safety, reliability, capacity. Also, we’ve had a nice 8% increase in shareholder's equity on the balance sheet. Lastly, I’d point out ratio to debt to total capitalization is a means for us to -- at a very high level, there are credit metrics, we did see an improvement, on a year-over-year basis, but we are at the high end of our 50% to 55% debt to cap limit this time. On the cash flow slide, the main thing I’d like to speak to here is, we had a $90 million improvement in cash flow from operations primarily driven by the improvement in net income and improvement in some non-cash adjustments, I think depreciation, those are the primary drivers and think also primarily driven from the hydro transaction. So that 90 million improvement in cash flow from operations was clearly not to help us cover incremental additions to PP&E that we did on a year-over-year basis and also to cover our dividend. We did make an acquisition, we talked about Beethoven, you can see that in there, but that was primarily financed by issuance of common stock and our borrowings during the year. The other thing I'd like to point out on the cash flow slide, you may have noticed that as a result of Beethoven PTCs and primarily the bonus extension, those two things will allow us now to be a non-cash taxpayer into 2020. Moving onto non-GAAP adjusted EPS, for the fourth quarter, our GAAP diluted EPS was $.92. That was slightly higher than the $0.85 from the prior year. From a diluted EPS perspective, we did add back $0.06 of unfavorable weather to get to an adjusted $0.98 on a comparative basis versus $0.89 in diluted EPS for the fourth quarter of 2014. On a full-year basis, we did have GAAP diluted EPS of $3.17. That was 6% higher than the GAAP diluted EPS of $2.99 from fiscal year ‘14. We did have several adjustments during the year as I mentioned, the $0.17 of unfavorable weather that we did add back, we did remove the insurance settlement and then we did add back the QF liability adjustment. Those netted to a $0.02 reduction, so the adjusted diluted EPS of $3.15. That's a 17.5% improvement over $2.68 from the prior year. A little more detail on page 13 and non-GAAP adjusted earnings, obviously, had a chance to take a look at these slides in more detail. I would have you focused on the green box at the bottom of the page, we do show down there, the 17.5% improvement of diluted EPS on a year-over-year basis -- on an adjusted basis, but also very nice improvement in pre-tax after all of the adjustments for 15% and 14 and 55% in net income of 42.5%. Regarding 2016 earnings guidance, diluted earnings per share range at $3.20 to $ 3.40 has not changed since the last time we shared our guidance. Primary drivers for that guidance of course normal weather, excluding any impacts associated with anything happening with the Dave Gates generating station and a FERC decision associated with that, but did adjust our income tax rate to a range of 9% to 13% and we do have a share out of 98.5 million on a going forward basis. We think as we look at our past performance and look forward into 2016, we will continue to target a 7% to 10% total return for our investors. I would also point out that the 315, $3.15 of adjusted earnings was within both our original and our revised earnings guidance of the year, revised at $3.10 to $3.25. So this variable to deliver on our attendance for the year. Moving forward to slide 15, excuse me, bridge if you will from net adjusted to diluted EPS in ’15 and $3.15 up to the midpoint of the $3.20 to $3.40 or 330 cent midpoint that we showed there. The primary movers, of course, I talked about and very high-level gross margin improvement, pretty sizeable gross margin improvement, primarily driven by South Dakota rate case, benefit of that, by the way, Beethoven as well, and [indiscernible’ on a year over year basis. Offset to a degree by current cost that we recover up in margin, going away in 2016, and also the elimination of LRAM that occurred, so we’ll not have any impact in 2016. On OG&A expenses increases, slight increase, it’s on a year-over-year basis, certainly a full-year cost of Beethoven and inflationary costs for all of our business, but those are also offset by per expenses that will be going away in 2016. Bank property taxes, depreciation and interest expense going up of course as we continue to grow the business and as we put a note on the slide we certainly show incremental tax benefits as I talked about earlier in the Beethoven production tax credits, bonus depreciation and increased repairs tax deduction. With that I will pass it back over to Bob.

[Bob Rowe:]

Thank you very much Brian. I’ll start with a little discussion of the hydro system as you know 2015 was the first full year of operation of the hydro system and despite some pretty dry weather we hit right at our targeted production based on the five-year historical average and that really was an indication of the benefit of the diversity of our system. One of the presentation’s to the Board of Directors actually was from one of our senior project engineers in hydro and among other things he was explaining and discussing the way operation [00

[Travis Meyer:]

I may be looking for a job soon.

[Bob Rowe:]

Not at all. Travis does a fantastic job as you all know.

[Travis Meyer:]

Jessica, we can open it up for questions.

[Operator:]

Thank you. [Operator Instructions] And we will now take a question from Dan Eggers with Credit Suisse.

[Dan Eggers:]

Hi, good afternoon guys. You covered most everything, but just a couple of follow-ons. One on the 2016 guidance, you guys use normal weather, it’s been obviously very mild in the northeast. How are you guys shaping up on weather, obviously month end but is that anything we should be keep in mind already?

[Brian Bird:]

Yeah, I would just say that January wasn’t as good as we would like. You can follow up on in a few days there. And we’ve already taken that into consideration in our filing for 2016.

[Dan Eggers:]

Okay. Question number two, I guess, Beethoven was one of those nice surprises that came though last year with the tax extensions for solar and for wind. Are you guys seeing any need or any opportunity maybe to tad some more renewables this year and next year.

[Bob Rowe:]

Honestly, no, and that’s something on the Montana side we will certainly address in our plan. There are opportunities too, in any way produce cost to customers as we did at Beethoven. We are certainly going to look at that. Our plan is going to focus on the capacity needs - in Montana, we are part of the Pacific Northwest. One of the interesting things there is the Northwest Power and Conservation Council is taking comments in its most recent regional plan and we looked a lot like the Pacific Northwest in focusing on strategies to meet those capacity needs.

[Dan Eggers:]

So does that belong to the lines of maybe some gas generation or some peak just for diversity in some responsiveness or what are you thinking?

[Brian Bird:]

Dan, I would say this. I mean, I think we’ve talked about having peaking needs in South Dakota and Montana on a going forward basis. I think we will get into more details on that when our plan is released at the end of the first quarter and we will certainly put more clarity around that.

[Bob Rowe:]

What you will see in the plan is it’s a comprehensive and very robust document, supply department runs multiple scenarios and again the point is to meet our customer’s needs in the most reliable way and cost effectively.

[Dan Eggers:]

And just to clarify, that is or is not included in the CapEx numbers in slides today?

[Brian Bird:]

Yeah, it is not included. Once we identify the timing, the dollar amounts associated with projects like that we put that in our CapEx and certainly in our 10-K if we don’t know the timing and amounts we don’t include those in plans and we note that in our 10-K, those types of things aren’t included certainly in our investor materials as well.

[Dan Eggers:]

Okay, thank you guys.

[Operator:]

Our next question will come from Chris Elinghouse with William Capital.

[Chris Elinghouse:]

Hey, guys, how are you.

[Brian Bird:]

Hey, Chris.

[Chris Elinghouse:]

Bob, you were talking about hyrdo and the drought conditions, have you guys given any thought to – what kind of upside to hydro operations you might see, however, you might want to define it, gross margin or whatever under more normal hydro conditions?

[Bob Rowe:]

Sure, we’ve planned based on five years of actual performance and we’ve seen for the last year that really pretty well nailed it. We don’t know what likely performance will be during the year, until later in the spring. For example, in Montana quite often there will be light snow and spring rains. There certainly is some upside in how we operate the system, but also it’s significant and this will be discussed in the plan. There is unutilized capacity at a number of the dams, where if it made sense, if it were cost effective, we could add generation to existing dams.

[Chris Elinghouse:]

Okay. Brian, this question is for you. On page six on the reconciliation for the year, I am a little bit confused on the hydro transaction costs that you specify $9.5 million pre-tax $5.8 million after tax. Are you trying to tell us there that there were some lingering transaction costs in 2015?

[Brian Bird:]

No, those are - what we are saying on a year-over-year basis, we had no cost in 2015, those were costs in 2014. That’s the favorable variants in 2015.

[Chris Elinghouse:]

That’s where I am getting confused, because I thought the after-tax hydro transaction cost and whatnot from 2014 were like $9.5 million after tax.

[Brian Bird:]

No, they are pre-tax.

[Chris Elinghouse:]

Okay, thanks. And lastly, can you give us any color on your efforts for pursuing optimization of DGGF?

[Bob Rowe:]

That’s something that again will be addressed as part of the plan, so stay tuned there.

[Chris Elinghouse:]

Okay, so that will get addressed in IRB?

[Bob Rowe:]

Yes.

[Chris Elinghouse:]

Okay.

[Bob Rowe:]

Although we don’t refer to it as formal IRB, it’s the Montana Electric Supply Plan.

[Chris Elinghouse:]

Right, okay. Thanks a bunch.

[Brian Bird:]

Hey, Chris, just one item. On the $9.5 million, one thing you might be thinking about this is the operating expense. We also did have last year bridge fees which we were down in interest expense associated with hydro transaction. You might be looking at two of those together on an after tax basis is probably around the $9.5 million.

[Chris Elinghouse:]

Okay, got it.

[Bob Rowe:]

That’s why Brian and I are minions.

[Operator:]

And we will take a question from Paul Ridzon with KeyBanc.

[Paul Ridzon:]

Good afternoon.

[Bob Rowe:]

Hey, Paul.

[Paul Ridzon:]

Brian, one of the things you mentioned in the call was I think a headwind from gas deferral at the reserves, can you give some more flavor what that is?

[Brian Bird:]

One thing Paul is we’ve had these gas production assets for some time they have been flowing through a track, right, and those assets haven’t been put into rate base. As we’ve gone through the gas tracker hearings and an agreement that ultimately those costs we would reduce what we receive on the cost to actual cost levels and so that was what we deferred down to our actual cost levels on gas production assets.

[Paul Ridzon:]

How much was that?

[Brian Bird:]

1.9 million.

[Paul Ridzon:]

And then I guess in the last six months we’ve seen an equal number of M&A deals, just wondering how you are thinking about scale and synergy opportunities against the backdrop of very cheap financing available.

[Bob Rowe:]

I think you know our usual answer which is we don’t comment on M&A. We’ve got plenty there to keep us busy and when we do pursue opportunities, as we were a hydro, we try to be pretty disciplined.

[Paul Ridzon:]

Okay, thank you.

[Bob Rowe:]

Thank you.

[Operator:]

We will now take a question from Brian Russo with Ladenburg Thalmann.

[Brian Russo:]

Hi, good afternoon. Can you just add a little bit more color on bonus depreciation and the fact that you guys use flow through accounting, is there any adjustment to your rate base or it just kind of flow through the effective tax rate?

[Brian Bird:]

Hey, Brian, it’s a difficult concept to explain, but as you know those utilities that are cash taxpaying utilities, they have ultimately have the benefit of - they have this incremental cash they could continue to invest, but they are also have deferred tax liability that builds and there is an offset to rate base. In our case, because of the flow through nature of our business and the fact that we are a non-cash cash taxpaying entity, we still create a deferred tax liability, but because we are non-cash taxpaying entity, we have an offsetting deferred tax asset and it’s not necessarily offsetting dollar per dollar, but relatively close, and as a result, we don’t have as much impact on a rate basis as our peers would have.

[Brian Russo:]

Got it. Okay. And just to be clear, the transmission project expansion on slide 23, is that in your CapEx or is that incremental because it’s things you are working on?

[Brian Bird:]

That is in.

[Brian Russo:]

It’s in the CapEx. Okay. And then just lastly, can you share with us what your earned ROE was in 2015?

[Bob Rowe:]

Yes, Brian, I think we even gave that maybe on the last call, I think for our electric business, we provide for our Montana business, in our Montana, we reported for the electric business it was 11%, and for our gas business it was approximately 8%. And so our South Dakota business, we don’t share that and certainly you guys can calculate our actual ROEs in overall company. So hopefully that’s helpful.

[Brian Bird:]

Hey, Brian, I don’t know, were you asking for 2015 though? I thought I heard you asking 2015, not ’14.

[Brian Russo:]

It was actually for 2015.

[Bob Rowe:]

That answer for 2014. We won’t know 2015 until we actually calculate our Montana annual report and that will – we will have that out here shortly. So in the first quarter call, we will be able to get that. Thanks, Brian.

[Brian Russo:]

Okay. And 11% on Montana electric in ’14, that was helped by favorable weather, right?

[Bob Rowe:]

Items in there that adjusted higher than our authorized rate of return, it wasn’t necessarily weather. There were some adjustments in there that did actually have it higher than what we’re allowed to earn.

[Brian Bird:]

Then biggest item in there was the Safe Harbor election repairs tax benefit that we had a multi-year benefit and that was probably the biggest item benefiting that last year.

[Bob Rowe:]

But again, ‘15’s results won’t be available till the end of the first quarter.

[Brian Russo:]

Okay. And any thoughts on what ROE ranges are contemplated in your ’16 guidance?

[Bob Rowe:]

We don’t share that in our ’16 guidance. You can come up with an estimate based upon our range, estimated all-in ROE, I presume, but we don’t share what our estimated ROEs are going to be.

[Brian Russo:]

Okay. Understood. And then is the – loss of the LRAM revenues, is that contemplated and assumed in your 2016 guidance?

[Bob Rowe:]

Yes, it’s good question, and it is. We do not have any LRAM revenues. And if you might recall, Brian, I even mentioned that, but I talked about those things that would have had been additive to gross margin and those things that would reduce gross margins on year-over-year basis, LRAM was one of them.

[Brian Russo:]

All right. Great. Thank you very much.

[Bob Rowe:]

No LRAM in 2016.

[Brian Russo:]

Thank you.

[Operator:]

We will now go to Brian Shin with Bank of America Merrill Lynch.

[Brian Shin:]

Hi, good afternoon. I know you mentioned it briefly in the prepared remarks, but could you go give a little bit more color on the repair tax deduction adjustments and how we should be thinking about that for ’16 and going forward?

[Bob Rowe:]

I don’t think I could give a tremendous amount of details there, but it does have an impact on our effective tax rate, and it’s an impact in terms of the benefit that we show in our earnings in our bridge, but I don’t give a tremendous of detail in terms of what we expect repairs tax to be on a year-over-year basis.

[Brian Shin:]

Is there a sense when repair tax deduction impact begins to fall off, can you give us some like general color with regards to the timeframe?

[Bob Rowe:]

That’s a very good question and we haven’t provided that in the past, and I am not sure, we are ready to prepare that – provide that at this time.

[Brian Bird:]

Maybe a thought that we can add – the color we can add Brian is we’ve talked about our effective tax rate being into the mid-to-low teens into 2017 and that maybe will help you a little bit on repairs tax deductions.

[Brian Shin:]

Okay. That’s helpful.

[Bob Rowe:]

I think what we probably should be able to do Brian as well, and we will endeavor to do this is, we certainly have given you thoughts on how long will be a non-cash tax period through 2020. We will endeavor to provide you ETR ranges out through 2020 as well.

[Brian Shin:]

Right, got you. Okay. That’s helpful. And then I apologize if I may have missed this in your comments earlier, but I thought I saw the CapEx numbers had ticked up in 18 and 19. Did you actually specify what caused that increase in CapEx outlook, and if you did, I will just go back and look at the transcript?

[Bob Rowe:]

No, we don’t and we effectively just laid out through the five-year period, so we don’t give as much specificity in terms of what those items are. Part of our infrastructure plan is driving some of that of course, but three are also lumpy transmission projects that are in there as well. And as we pointed out earlier in the call, certainly it doesn’t include any peaking projects on the gas reserves and anything like that. It’s really investment in our existing T&D and supply – and existing supply business.

[Brian Shin:]

Got you. Thank you very much.

[Operator:]

We will now take a question from Jonathan Reeder with Wells Fargo.

[Jonathan Reeder:]

Good afternoon. Following up a little bit on Brian, the CapEx budget, I know you said on the call, later in the period, it typically falls off, because you’re not as certain about something, should we expect a fall off though in my 2020 just from conclusion of the DSIP and TSIP plans, or is there likely more spend along those lines to keep that portion from falling off?

[Bob Rowe:]

The reason the plan falls off is because we are very clear to include tangible projects that we are committed to and then if you took any five-year cherries and compare that one year to the next, you typically would see additional capital. But what we are driven by here is what the needs are in our system to serve our customers, and what we don’t include are the additional opportunities that at any given point are just that opportunities.

[Brian Bird:]

I would add to that too, and this may relate back to the Brian Shin’s question, you know, capital spending forecast you would have seen a year ago, would have had less capital spend in ’18 and ’19 than we are showing bow. And to Bob’s point, as we did more specificity around what we’re doing from an infrastructure standpoint, these numbers get updated every year and I think every one of these forecasted you have seen over the last ten years, they do taper out in the back end, because we are just not sure what projects we have less specificity on those five years. My expectation is though when we come out with our resource pan, some of this fill in certainly in the back-end, if not even in some of the front-end of this schedule in terms of Capital spend, but you will have to the wait till the first quarter to see that.

[Jonathan Reeder:]

Okay. So is it fair to say the portion kind of right now is earmarked for DCIP and TSIP, you would think could be replaced by either similar type spend or other kind of spend where the $300 million annually is kind of a good run rate?

[Bob Rowe:]

Yes, I think that’s a good way to look at it. If in fact from an infrastructure standpoint, we find that there is a need for us to increase our spend in this, we are going to likely try and spread this plan over future years. I think you make a good point, and we obviously see it in our forecast plan. We have a certain level of spend that we feel that we can take into consideration our cash flow, our dividend and everything else and taking those. So I – in long story to answer your answer your question, but effectively that’s a pretty good level of spend for us and we will try and fit within that level of spend. And things would get lumpy with acquisition and other projects as you know, but on a going forward basis, it just look like a good level of spend for us.

[Jonathan Reeder:]

Okay. And then Brian, directionally if you can kind of give us some ideas where you see kind of your operating cash flow coming in for 2016 compared to, I think where we were in ’15?

[Brian Bird:]

I expect it to be slightly higher, but I – we don’t share our budget from our cash flow perspective and you can argue that, in light of our earnings growth that’s certainly going to be a driver, but other movements in the non-cash items could occur as well.

[Jonathan Reeder:]

Okay. So the main driver would just be the increase kind of net income depreciation, the way you see it?

[Brian Bird:]

That’s how I see it, but that’s the specificity you will get out of me today.

[Jonathan Reeder:]

And then last question, is it fair to say that you’re more bearish today than you were say on the last call in regards to doing natural gas reserves acquisition in the near-term? I mean, you’re always – you’re kind of talking about the pressures, but it just seem you’re less optimistic today.

[Bob Rowe:]

I wouldn’t say bearish, because the value is just so clearly there for customers, I will say personally, I am frustrated, we have not been able to capture those opportunities, because it just – it makes so much long-term sense for customers, but not bearish and we’re still actively looking for any opportunities. The other thing we have growing on in the gas production that we control right now is just trying to really capture the full value of those assets for our customers as well. So it’s actually a lot of activity going on there.

[Jonathan Reeder:]

Great, thanks. I appreciate the time. John Hines, our Vice President for Supply, do you want to add some color to that?

[John Hines:]

Then only thing I would add is that there is a lot of research, lot of looking going on, but the prices that that we’re seeing right now we’re fundamentally not seeing a lot of individual, their entities willing to sell at these prices.

[Operator:]

[Operator Instructions] We will take our next question from Doug Christopher, D.A, Davidson.

[Doug Christopher:]

Hi, thank you very much. Just have a question regarding the strength of the service territory, can you provide a little bit more color regarding some economic observation, in Montana and South Dakota area?

[Bob Rowe:]

Yes, and this is actually a good time for that. First of all, South Dakota, very strong, very steady, not rapid growth, but the story has been a consistent one for a number of years. There are good opportunities at our South Dakota service territory. We work with all of the South Dakota communities through a program we sponsor called Advantage South Dakota. A big focus of theirs is actually work force recruitment as opposed to the job recruitment. There are a plenty of job. So low growth, not dramatic, but it’s strong. On the Montana side, we actually just got off the road every January and February, we go out with the University of Montana Bureau of Business and Economic Research, which sponsors community economic seminars in every one of the -- what we call major cities. And what was interesting this year was that in every city, even Billings, which is seeing some relative slow down as a result of decline in the Bakken that still has a very diversified economy, the number one subject with the exception of Indian country, the number one subject is workforce development and worker recruitment. So generally, not fast growth, but we are seeing new connections on the electric and gas side and it’s solid and sustainable growth. The area where we are seeing dramatic growth, really almost back to the pre-recession levels is Bozeman. We talked about the project work we have going on down in the Big Sky area, but just generally in Bozeman, it’s a very dynamic part of our service territory. So I would characterize overall, overall our service territory is healthy and strong with some areas of pretty significant growth.

[Brian Bird:]

I would add to that just, Doug, we – you will see in our materials, we have customer counts for both electric and gas and you can see Montana has been a bit stronger and I think of a new connected customer reports that we get and Montana certainly showing stronger than South Dakota and Nebraska and you can see that all, but the relative customer increases we are seeing on the residential side 1.4% growth in Montana, on the electric side, 1.3% on the gas side. So pretty decent customer growth and as Bob, some of these new connections are back to the kind of 2007, so we are – we see that’s intriguing. We are waiting to see how that translates into better volumetric growth on a going forward basis.

[Doug Christopher:]

Thank you very much.

[Operator:]

And it does appear that there are no further questions at this time. Mr. Meyer. I would like to turn the conference back to you for any additional or closing remarks?

[Travis Meyer:]

Thank you, Jessica. I will pass back to Bob.

[Bob Rowe:]

Thank you for your interest and support over the last year. It was an exciting year for all of us at Northwestern and I think for our customers as well. Look forward to seeing many of you over the coming months and to talking to all of you after we report on the first quarter. Thank you.

[Operator:]

This concludes today’s conference. Thank you for your participation.