Q1 2021 Black Hills Corp Earnings Call
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Thank you for your patience the Black Hills Corporation's earnings Conference call will begin shortly again. Thank you for your patience the Black Hills Corporation's earnings Conference call will begin shortly.
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Good day, ladies and gentlemen, and welcome to the Black Hills Corporation first quarter 2021, the earnings conference call.
My name is Peter and I'll be your conference coordinator for today at.
At this time, all participants on the listen only mode.
Following the prepared remarks, there'll be a question and answer session if you'd like to participate in this portion of the call. Please press star followed by one at any time during the conference.
It's the assistance is needed at any time during the call. Please press star followed by zero and the conference coordinator will be happy to assist you.
As a reminder, this conference is being recorded for replay purposes.
And I'd like to turn the presentation over to Mr. Jerome Nichols director of Investor Relations of Black Hills Corporation.
Proceed sir.
Thank you Peter good morning, everyone.
Welcome to Black Hills Corporation's first quarter 2021 earnings conference call.
You can find our earnings release and materials for our call. This morning at our website at Www Dot Black Hills Corp, Dot com under the Investor Relations heading.
Leading our quarterly earnings discussion today are Linn Evans, President and Chief Executive Officer, and Rich Kinsley's, Senior Vice President and Chief Financial Officer.
During our earnings discussion today some of the comments, we make may contain forward looking statements as defined by the Securities and Exchange Commission and there are a number of uncertainties inherent in such comments on.
Although we believe that our expectations and beliefs are based on reasonable assumptions actual results may differ materially.
We direct you to our earnings release slide two of the Investor presentation on our website and our most recent form 10-K and form 10-Q filed with the Securities and Exchange Commission for a list of some of the factors that could cause future results to differ materially from our expectations.
Patients.
I'll now turn the call over 10 of the Linn Evans.
Thank you Jerome good morning, everyone. Thank you for joining us today.
I'll begin on slide four which lists our key achievements during the first quarter.
Our top priority of Black Hills Corporation of safety, which works hand in hand, with reliability and are predominantly cold weather service territories.
I'm proud of our team's exceptional and resilient performance.
The Black Hills team, along with our electric and natural gas systems, and our generating fleet performed very well through the historic deep freeze of the winter storm jewelry. We successfully served of extraordinary demand keeping our customers safe through life threatening cold conditions across our service territory.
Our balance mix of power generation resources, including reliable and dispatch of coal generation capacity.
Allowed us to completely avoid rolling blackouts experienced in other areas of the country, even while our South Dakota Electric utilities served of new winter peak load.
Of course, our success in serving our customers during winter storm year. It didn't happen by chance rather it was the result of our relentless focus on our customers and ongoing investments for our safe reliable and resilient infrastructure.
Winter Storm Yuri demonstrated how critical energy is to our daily lives. The storm highlighted the need for safe reliable natural gas utilities and reliable generation capacity when our customers experienced temperatures as low as 27 degrees below zero set a numerous all time record lows across our communities.
As an example, Lincoln, Nebraska reported 11 straight days of temperatures below zero in February with lows of the minus twenties.
Recognize the essential value of natural gas. During these weather events were pleased that for of our six gas States, Arkansas, Iowa, Kansas and Wyoming.
Recently passed legislation that protects our customers freedom to choose the type of energy is right for the.
Last week, we announced we joined the one future coalition of gas utility companies, who are voluntarily reducing emissions. This is in addition to our previously announced participation in the Epa's methane challenge as we enhance our commitment to modernize that make our pipelines more of resilient.
Continuing on slide four we remain encouraged by the ongoing steady growth of new customer connections driven by population migration into our service territories.
Our team also showcased our agility and the strength of our financing strategy during the first quarter.
Given the unprecedented and unforeseeable market pricing for natural gas in February we immediately supplemented our liquidity with additional short term financing by securing an $800 million term loan on favorable terms. This term loan and other ongoing cash conservation initiatives ensures our ability to continue fun.
Our strong capital investment program.
Slide five sets out our financial outlook.
Our first quarter financial performance was tempered by costs brought about by storm Yuri as outlined in our earnings release. However, absent these storm costs of our financial results for otherwise strong.
February storm, we immediately implemented expense and cash management initiatives and we are executing on other opportunities to mitigate the impact of the storm rich will cover the details in his financial update.
Given these ongoing initiatives and the opportunities we see for the remainder of this year. Our 2021 earnings guidance remains unchanged. We also reaffirmed our 2022 earnings guidance and we remain confident in our long term growth targets, including 5% to 7% earnings growth for 2023.
Through 2025.
At least 5% annual dividend growth.
Slide six illustrates our disciplined growth plan with upside potential.
We plan on capital investments of more than $3 billion through 2025, and we expect to identify and develop incremental projects.
We're also developing other growth opportunities, including less capital intensive projects, such as data center load additions and other innovative customer solutions, including renewables and other technologies.
I noted already that we're seeing accelerated population migration into our service territories and we're gaining confidence this trend will continue.
The last item on this slide is the focus on cost discipline and continuous improvement. These are long term initiatives for a leaner more efficient processes and the use of new technologies to be better every day.
Moving to slide seven we've made progress on our regulatory initiatives.
Our team is finalizing three rate review of applications to be filed in the second quarter.
We plan to file a new rate review for Colorado gas and we recently completed the hearing before the commission regarding our ongoing safety and integrity of investment rider.
In Kansas, We're filing our first rate review of seven years, which renews, our five year systems safety and integrity investment rider.
And in Iowa, We plan to file our first rig review of more than a decade, including a request for a new systems safety and integrity of investment rider.
In addition to our normal regulatory activity, we're engaged with regulators regarding recovery for costs associated with store jewelry.
Moving to slide eight.
For our electric utilities resource planning is a key focus as we determine how best to reliably and cost effectively serve growing customer demand and achieve our greenhouse gas emission goals.
We're targeting early July to submit our integrated resource plan for our jointly operate of South Dakota, and Wyoming Electric systems.
For modeling various scenarios to meet our growing customer demand.
Actual modeling, which is always subject to change indicates the need to add renewable of dispatch for natural gas generation battery storage additional transmission and upgraded pipeline capacity.
The scenarios consider customer impacts and achieving our greenhouse gas emission goals.
We're also modeling of scenario that considers the biden administrations economy wide greenhouse gas emission goals and what that would cost customers.
I am excited about this process as we look to provide greater clarity on these future opportunities in the upcoming months.
And finally on slide nine we are well positioned as an integrated utility with the strong long term growth outlook for executing our customer focused strategy and are confident in our future.
I'll now turn it over to rich for the financial update.
Thanks, Lynn and good morning, everyone Slide 11 summarizes earnings per share for the first quarter, we delivered EPS of $1 54, compared to $1 59 as adjusted in Q1 2020.
Impacts from Winter storm, Yuri overshadowed what was otherwise solid financial results the <unk>.
Net storm impacts were <unk> 15 per share, which more than offset weather favorability and the benefit of new rates.
We estimate weather benefited earnings by <unk> <unk> per share compared to normal for the quarter heating degree days were 4% higher than normal at our electric utilities and 3% higher than normal at our gas utilities attributable primarily to extreme cold in February offsetting warmer than normal weather in January and March.
Compared to Q1 2020 of the weather impact was favorable by <unk> 11 per share given the warm or warmer than normal first quarter heating season last year.
Slide 12 details how we are addressing winter storm Yuri impacts in the first quarter, we incurred approximately $571 million of the incremental costs to serve our customers.
This includes $559 million of deferred utility fuel costs, we booked as a regulatory asset.
We've had constructive dialogue with regulators and of filed or expect to file our remaining storm related regulatory recovery requests in the second quarter we.
We've already filed requests for our gas utilities in Arkansas, Iowa, Nebraska, and Wyoming and for South Dakota Electric recovery plans vary by state with proposed recovery in some states within one year, while other states may take up to five years or longer.
In the first quarter, we booked storm related net expenses of $12 5 million pre tax or <unk> 15 per share after tax.
The largest contributor was $8 2 million of non recoverable incremental gas purchase costs at Black Hills Energy services, which serves 52000 of our regulated utility customers in Nebraska, and Wyoming through the choice gas program.
This program allows customers the option to choose their gas provider and is supported by our hedging and procurement plan based on demand history and forecast.
Serving our choice gas customers as of small low risk and profitable piece of our business. However, it was subjected to the unprecedented market pricing and the elevated demand caused by storm Yuri.
For our electric business as the impact to our wholesale power margin sharing of $3 2 million was partially offset by $1 $7 million of power generation benefits.
We also incurred $2 $1 million of fuel costs that are outside of our regulatory cost recovery mechanisms, primarily in Montana, where we serve two industrial customers pursuant to contracts.
This small piece of our utilities is typically very low risk, but was subjected to the same unprecedented market pricing and elevated demand.
In February we immediately implemented strategies to mitigate the 15 EPS impact from Yuriy over the remainder of the year through cost management ongoing wholesale power marketing opportunities and identified regulatory proceedings.
Slide 13 illustrates the drivers of change in net income year over year for the first quarter all amounts listed our after tax.
The main drivers compared to last year, where gross margin improvements at our gas utilities offset by storm Yuri impacts of natural gas margin increases were driven by weather favorability in new base rates and rider recovery on investments for customers.
Electric utility margins were lower than the prior year, primarily due to tax reform benefits that we passed on to our Colorado electric customers.
We credit at over $9 million of tax reform benefits, which lowered revenue and had an offsetting income tax benefit resulting in minimal overall impact of first quarter results.
The additional quarter over quarter tax benefits on the far right were related primarily to additional production tax credits related to the Corriedale wind project that went into service in late 2020.
O&M was impacted by higher employee costs and outside services.
The side services increased over the prior year because of higher director fees tied to our stock price performance, which was much stronger in Q1, this year compared to last year.
The change in other income expense over the prior year was driven by market impacts on nonqualified deferred compensation expense.
Additional first quarter detail on segment earnings can be found in the appendix you can also find additional details on year over year changes in gross margin and operating expenses in yesterday's earnings release.
Slide 14 shows our financial position through the lens of capital structure credit ratings and financial flexibility, we have a manageable debt maturity profile and are committed to maintaining our solid investment grade credit ratings.
At the end of April we had approximately $530 million of available liquidity on our revolving credit facility.
In February we entered into an $800 million nine month term loan to bolster our liquidity in light of the increased fuel costs related to storm Yuri.
We repaid $200 million of that term loan at quarter end and are developing the appropriate refinancing strategy for the remaining $600 million as we finalize storm year recovery mechanisms I expect we will issue debt with the three to five year term in the second or third quarter to match the recovery period of the bulk of the dollars.
From the deferred storm year of fuel cost.
New debt and deferred recovery of fuel costs temporarily increased our debt to total capitalization ratio to 62% at the end of March.
As we recover storm costs repay debt and execute on our equity program, we expect to reduce the debt total capitalization ratio and continue to target a debt to total cap ratio in the mid fifties.
Our equity issuance expectations are unchanged, we expect to issue $100 million to $120 million in 2021, and $60 million to $80 million in 2022 through our at the market equity offering program. We will continue to evaluate financing needs as we finalize our storm cost recovery proposals.
Moving to our dividend on slide 15 in 2020, we proudly marked 50 consecutive years of annual dividend increases one of the longest track records in our industry. Since 2016, we have increased our dividend at an annual average annual rate of six 6%.
Looking forward, we anticipate increasing our dividend by more than 5% annually through 2025, while maintaining our 50% to 60% payout target.
In closing we thank you for your interest in Black Hills, we are uniquely positioned as an integrated utility in constructive jurisdictions with the complementary business mix of cross stable and growing territories, we continue to be well positioned both operationally and financially to be ready to serve all of our stakeholders.
And with that were available to take your questions.
Thank you Sir.
Ladies and gentlemen, we are ready to open the lines for your questions. If you wish to ask a question. Please press star followed by one on you touched on the telephone if for your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Again, Please press star one to ask a question. Please standby for your first question.
I show. Our first question comes from the line of Michael Weinstein from Credit Suisse. Please go ahead.
Hi, guys.
Good morning, Michael how are you.
Yeah.
And.
Colorado.
Can you.
How have the how is the new case spin.
<unk> by the prior.
The settlement discussions.
Have you found that to be.
I guess helpful with the new filings.
Is there.
It's basically the same staff right. So your is there a.
I don't know is the reason to be hopeful that the new case will be resolved quickly and maybe.
Along the same lines of the prior settlement discussions.
Thank you Mike for the question, we will re file the case during the in the second quarter, we have not quite re filed it yet because we want to make sure that wasn't implied in your question. We were asked to re file of the phase two.
And file a new phase one so that's what we're working on now will have the phase III filed shortly we will have the phase. One also filed during the second quarter. As you indicated yes. We are hopeful the prior case, we had worked very closely with staff office of the consumer Council the.
<unk>, our case and that we thought that the conversations were very constructive and so we are similarly hopeful and anticipate the when we filed the second case for re filed the so he is one case that will have a similar response in the similar engagement with the staff and with the office of consumer Counsel. We're also.
So I think we might benefit from the three relatively new commissioners that we have.
And at the Colorado Commission and then also we really kind of very focused on the blocking and tackling some of our last cases involved issues around the jurisdiction simplification combining rates things of that nature. We are no longer pursuing those in Colorado. So and also very recently we finished of hearing.
On the Ssi on the system safety and integrity rider that finished last week and so we anticipate a decision on that within the next six weeks. So I think all of those combined.
Set us up nicely are much better positioned in Colorado as the go forward.
And it sounds like a smoother process going forward.
<unk>.
The Oh is there anything.
In terms of large projects for the capital plan that are not included in the capital plan are there any.
Maybe any any color on.
Potential projects that you might be looking at or could be considering at this point.
Thanks again, Mike we've got the $3 billion capital program over the next five years as we've always said, we anticipate incremental opportunities that are inside of that and perhaps beyond the.
An important element that we're working on now is the integrated resource plan that we'll be filing or submitting I should probably say in Wyoming and South Dakota in early July as our current plan. We anticipate through that we will have some opportunities that will be identified and serve our growing customer load.
With respect to transmission energy storage I E batteries dispatch of the gas generation and also some renewables opportunities none of the or very little of that well, let me back of some some of our transmission opportunities are included in our current for.
Capital forecast, but none of the other opportunities that are identified are included in the so we're very hopeful in that regard, we're also serving growing customer load and customer demand.
Were moved from about 1% growth well into one 5% migration of <unk> customer count growth within our service territories. That's been very helpful to us as well so continuing to serve that the poultry barn kind of growth that we're seeing in the Arkansas and Nebraska, We've got alternative agriculture in Colorado that we are seeing continued to grow.
<unk> et cetera, so those of the things that we continue to look at of course storm Yuri as.
As we look at that closer and do a debrief on a real real deep analysis on that the.
The investments that we have been making with new interconnects, adding pipelines to increase resiliency and reliability of been very helpful and so for.
Certainly looking at what we can learn from storm jewelry and continue those kinds of investments that we believe will help us.
Or mitigate those things that we can control that we learned through storm area as well.
I see alright, thank you very much.
Thank you Mike I appreciate it.
Thank you.
Question comes from Ryan Greenwald from Bank of America. Please go ahead.
Good morning, guys good.
Morning, Ryan.
Can you talk a bit about how you guys are kind of trending in the guidance range here, given that the earning impacts and dive a bit deeper into the mitigating factors, particularly when it comes to the regulatory actions around what's hitting the income statement here.
Yes.
First Ryan good morning, it's rich first of all I would say it's early in the year. So we're not going to we reaffirmed our range, we're not guiding towards the upper or lower end, we're comfortable with the range. We're comfortable we can mitigate the impacts from Yuriy. When you look at slide 12.
The the.
Items debt, we can take some actions on two to.
The recapture some of that if you will the wholesale power margin sharing line items, we think we've got opportunities to mitigate that as the year goes along in terms of clawing that back if you will.
And then the term loan interest expense the smaller item there certainly will be talking with the with our regulators and our discussions about the storm recovery about including that and are confident that will occur.
And then when you look at the remainder of the items of about 10 of the 15.
That's where we're focused on on cost <unk>.
Controls this year as Linn noted.
Talking to them before the call we had the flex those muscles last year with COVID-19 and we will just continue to flex those muscles and believe we have ample opportunity to mitigate the majority or all of debt remaining amount.
Got it fair enough and then in terms of the regulatory process from here. The agenda is getting pretty busy again can you just remind us in terms of expectations for timeline and process in each jurisdiction with the upcoming rate cases.
Sure. We can do that Ryan we have three rate reviews that we intend to file in the during the second quarter.
That's on top of the phase two that will also be filing in Colorado, So starting with Colorado as I indicated in my response to Mike's question, we anticipate this quarter to file the rate review in Colorado gas, which.
Places the <unk>.
Gas case that we had filed back in September of last year. We also intend to file the case in Iowa and that'll be our first case in the last since 10 years ago. When we filed our last rate review in Iowa, and then the Kansas will be filing a case there thats been seven years. Since we filed debt is primarily to ensure that we can renew.
On the safety system integrity rider that has the sunset in Kansas will also be let me go back to <unk>, who will also be asking for a system safety integrity rider for Io as well, which of your first one there for successful in obtaining the so those are our three primary cases will be working on this year Ryan.
I think part of your question Ryan if I interpreted the rate was timing of the procedural schedules associated with those in there.
They are different for each state, but generally speaking you can kind of think of probably Q1 next year.
Resolution on those hopefully we can wrap some of them up more quickly, we'll see but that would kind of be the procedural schedule to think about one other kind of side note is that in Iowa, we do get interim rates. Shortly after we file so that's an important consideration for this year.
Great I'll leave it there thanks for the time.
Thanks for thanks Ryan.
Thank you. Our next question comes from the line of Andrew Weisel from Scotia Bank. Please go ahead.
Hey, good morning, everyone. Thank you.
My first question is on the credit metrics. So obviously <unk> weighing on them as you described about a 3% increase in debt to cap.
The first of all does that include the term loan and then looking forward. You said you expect to recover about how quickly would you expect to get back to under 60% debt to cap, where you were around year end and by when do you think you'll reach of 55% target assuming accommodating decisions on the fuel cost recovery.
So there were a number of questions here one the 62% does include the term loan. So thats why we popped up from 59 at year end of the 62 now.
Second in terms of recovery.
Deep into the discussions as we noted in her comments, we filed in a number of our states already for recovery and we'll get the rest of the jurisdictions filed in the second quarter.
<unk>.
Some of the states I think we will recover as quickly as one year and some even just do our normal mechanisms of the smaller the smaller impacted.
<unk>, which are mostly on electric.
South Dakota, and Wyoming electric for the most part.
But then you think about the <unk>.
For stiction that were impacted a little more heavily like Kansas, Arkansas, Iowa.
The Colorado those are probably more of a three to five year recovery on those discussions are ongoing with the regulators in those states very constructive conversations.
We would expect to recover that in that fashion 32345 years.
<unk>.
Relative to getting back to 55% of course once once these mechanisms are all in place and were making those recoveries. It should start to rapidly Delever us right.
Andrew.
I think really we should kind of be if you think of three to five years from now we should be back to where we otherwise would have been.
Absent this deferred storm cost recovery.
<unk>.
I think that answers most of your questions credit metrics I think we're in good shape, there conversations with the rating agencies have been very productive and constructive as well.
Of course, they want to see how we come out with the regulators on what the recovery periods look like but we think we're on track to.
Meet their expectations and keep our credit ratings, where they are.
Okay. That's really helpful. Thank you and then just one follow up you put out the press release about joining our nation's energy future of the one coal one future coalition and Lynn I think you mentioned that in your prepared remarks apologies if I missed it but please remind me do you have a stated goal toward methane emission reductions if I recall your cash.
We're getting a 50% drop the greenhouse gas emissions from gas utilities by 2035 does joining this one future create opportunity to expand or accelerate that.
Correct on the fact that we joined <unk> on future Andrew and we also of our goal is 50% by the year 2035 of the reducing our intensity in our natural gas utilities.
The reason we are joining them as it allows us to really join the team with respect of how we report being very consistent also using best practices and learning the goal of the <unk> future is to reduce emissions below 1%.
At the group of the companies have already been successful in doing that so we'll continue to learn best practices that puts us in good company with that with respect of that also puts us in good company with how we report and ensuring that were consistent across the industry as well as we obtain that goal.
Yes.
I see okay. So.
Committing to a 1% methane level or is that not is that still being sorted out.
That's been sorted out, but that's part of what <unk> future is about ensuring that the members of those companies have reduced the remissions to 1% which is of different from the intensity of.
Coal that we put out reducing our intensity by 50% by 2035. So it was kind of measuring apples and oranges, there a bit Andrew.
Yes.
Okay understood. Thank you for explaining that.
Welcome. Thank you Andrew.
Thank you on.
The next question comes from the line of Brandon Lee from Mizuho. Please go ahead.
Hey, good morning.
Hey, Brian I, just had a quick hey, good morning.
I had a quick question and thanks for all of the updates on.
On the regulatory filings.
For your storm cost recovery.
Do you.
The issue the debt.
At the Opco or at the parent and if.
If it's at the parent level do you expect to recover all of the interest expense.
Yes. It is.
Going to differ by jurisdiction. The first of all of the issuance will be at the at the at the parent debt.
Typically how we do our financings much more efficient with our smaller utilities, the issuing small chunks of debt at all of the <unk>. So it will.
Certain of almost certainly be a parent company issuance.
Relative to recovery of those are the discussions we're having with regulators what does it look like the longer the recovery period is it changes, how we think about and how they think about recovery of carrying costs. So.
That can go a lot of different directions of the different states, but we do expect to recover our carrying costs.
Great. That's all I had thanks a lot.
Thank you.
Thank you as a reminder to ask a question. Please press star one on your Touchtone telephone.
I show. Our next question comes from the line of Brian Russo from Sidoti. Please go ahead.
Hi, good morning.
Good morning, Brian.
Hey, so just when I look at slide 22.
<unk> capital expenditures outlook do you have your base forecast of $2 seven and then.
The I guess incremental forecast.
In the press release under the 2022 guidance assumptions.
You noted you're going to spend $600 million right. So you've already relate you've layered in the $50 million of incremental projects in 'twenty two above your base forecast.
Effectively yes.
We are very confident.
Between projects you identified which are not yet included in the base forecast and are being evaluated for timing cost and so forth.
That's what debt line represents but we're confident we'll find those projects and get those numbers filled in the.
As the coming quarters and years flow out.
Right understood and you referenced the true.
In other Capex related question about the upcoming Rfps.
How contingent are these incremental projects on the irt's debt could take nine to 12 months to be acknowledged the quote unquote free.
Bye bye bye regulators or.
The incremental projects.
Relatively manageable is that could that just the.
More blocking and tackling on what youre already doing versus lumpy one off type of renewable projects.
Yes.
Great question, Brian what I would say, it's a combination of all the above certainly.
Some of the some of what the <unk> is going to point out there will be some near term opportunity associated with that but some of it is going to be behind this five year plan.
So a lot of this 50 to 100 million of here that you're seeing on this table is some blocking and a lot of blocking and tackling.
Relative to the programmatic spend some of it is some of the incremental projects that we foresee as well. It's just the mixture of everything you just described.
Alright, great. Thank you very much debt.
Brian for Brent.
Thank you.
With no further questions on the queue I would like to turn the call back over to the Linn Evans for closing remarks. Please go ahead Sir.
Thanks, Peter and thanks to everyone for joining us today and especially thank you for your interest and certainly your investment in Black Hills Corporation as we thought we would we spend some time this morning addressing the impact of the storm Yuri.
While we recognize the storm presented a very unique and likely extremely rare confluence of circumstances. We have been doing the same thing within our company is spending time thinking about storm here of the past several weeks and months and as we look for opportunities to mitigate the variables that we can influence during future on similar events.
Our electric and natural gas systems were extremely reliable and performed as late for designed our prior investments in the interconnections are investments in storage and reliability really paid off and kept our customers safe and healthy. So I can assure you. We're very hard at work in Q2 executing on our opportunities to deliver results for our customer.
And for you our shareholders and finally I want to say, thank you to the dedicated and focused team of Black Hills energy. Thank you for living out our core values, so admirably and serving our customers as well as you have every single day. Thank you for the so please stay safe and well and enjoy a black Hills energy Safe day, Thanks for joining our call today.
Thank you for your participation on today's conference. This concludes the presentation you may now disconnect good day.
Okay.
Okay.
On the dividend.
Yes.
And for <unk>.
Great.
Yes.
Sure.
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