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NorthWestern: Montana-ordered solicitation killed despite capacity shortfall

NorthWestern Corp.'s chief told investment analysts the company cancelled an all-source request for proposals Feb. 7, after Montana regulators shortened the time period for utilities to show benefits of acquiring new resources.

NorthWestern President and CEO Robert Rowe said the company reluctantly terminated the request for proposals, or RFP, that was issued in early 2017 for up to 150 MW of dispatchable generation capacity. This was a result of the Montana Public Service Commission's order requiring utilities to show benefits for customers of resource acquisitions over 15 years, rather than a longer period, Rowe said.

"And in the RFP, we looked at a 20-year window. And obviously the difference between a 20-year window and a 15-year window the commission had ordered, require that we terminate the RFP," Rowe said in a Feb. 13 earnings call.

This resulted from a July 2017 commission decision regarding maximum 15-year contract lengths for all new generation, according to the investor presentation to which Rowe pointed.

Rowe said the 15-year term is at odds with traditional regulatory treatment of long-lived assets that are generally depreciated over longer periods, and investors are uncomfortable with risk of shorter periods.

The RFP was one of the resource initiatives and actions developed in NorthWestern's Montana 2015 Electricity Resource Procurement Plan to identify critical future needs, the presentation said. Rowe said the company expects to issue its 2018 procurement plan in December to address issues the commission raised while identifying a lowest-cost approach to respond to the reserve margin needs. The 2015 plan called for the addition of hundreds of megawatts of gas-fired capacity in future years, but the commission expressed a lack of confidence in NorthWestern's projections, saying it failed to adequately engage stakeholders.

The investor presentation shows NorthWestern, which does business in Montana as NorthWestern Energy, has a negative 28% planning reserve margin that is projected to increase to a negative 50% by 2035 without the addition of new resources.

The presentation notes that about $123 million of previously included investment in generation capacity has been removed from the company's five-year, nearly $1.6 billion capital spending forecast pending an update of the company's resource plan, but NorthWestern added $144 million for grid modernization and automated meter infrastructure in Montana, South Dakota and Nebraska.

Analysts' questions pointed to concern about the utility's lower earnings. NorthWestern Vice President and CFO Brian Bird noted, "I should point out the negative outcomes in the upcoming regulatory proceedings may result in near-term returns below our 6% to 9% targeted return. And generation investment to reduce or eliminate our capacity shortfall could allow us to achieve the higher end of our range over the long term."

Michael Weinstein of Credit Suisse AG's research division said NorthWestern was able to make up the lower generation capital expenditure with more grid modernization.

Bird replied that if the company is able to reinvest in supply going forward, particularly to deal with its capacity shortfall, he expected NorthWestern would reach the high end of its earnings target.