Q2 2021 Black Hills Corp Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the Black Hills Corporation second quarter 'twenty to 'twenty 1 earnings Conference call. My name is Sarah and I'll be your coordinator for today.
At this time all participants are in a listen only mode.
All of them in the prepared remarks, there'll be a question and answer session. If you would like to participate in this portion of the call. Please press star followed by 1 at any time during the conference. If assistance is needed at any time during the call. Please press star followed by zero and the coordinator will be happy to assist you as a reminder, the.
This conference call is being recorded for replay purposes, I would now like to turn of the presentation over to Mr. Jerome Nichols director of Investor Relations at Black Hills Corporation.
Please proceed sir.
Okay.
Thank you Guy and good morning, everyone welcome to Black Hills Corporation's second 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, 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.
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 2 of the Investor presentation on our website.
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.
I will now turn the call over to Linn Evans.
Thank you Jerome good morning, everyone and thank you for joining us today I'll begin on slide 4 which lists our key achievements during the second quarter.
Our team delivered strong financial results with earnings of 21% compared to last year.
We also delivered solid operational performance was strong execution of our capital plan.
And we made excellent progress on our regulatory initiatives, including storm Yuri expense recovery actions.
After safety 1 of our key operational priorities is providing reliable and resilient service to our customers.
During the record breaking heat in June across the Western United States of the Black Hills team and our electric systems and generating fleet performed exceptionally well.
This was our second consecutive quarter that included the extreme weather events.
Of our energy delivery systems performed as designed.
During both quarters, our diverse mix of power generation resources, and our reliable and dispatch of coal generation capacity allowed us to serve customers and avoid rolling blackouts and other emergency actions that were required in other parts of the country.
The Black Hills team continued to execute our capital investment plan to maintain our enviable reliability of the system resiliency and to serve our growing communities. We're on track to deploy up to $647 million of capital for the year.
We continue to evaluate and develop new opportunities beyond 2021.
On the regulatory front, we had a very productive quarter as we said we would do we filed rate reviews in Colorado, Iowa, and Kansas and Colorado. We recently received approval for a new safety focused investment rider for our gas utilities.
And on June 30, we submitted our electric integrated resource plan for our South Dakota, and Wyoming utilities, which I will discuss in more detail at the moment and then rich will cover regulatory activity of more detail in his update.
Slide 5 lays out our financial outlook, we affirmed our 2021 earnings guidance based on strong second quarter financial performance. We also maintain our 2022 earnings guidance range.
We are targeting 5% to 7% earnings growth for 2023 through 2025.
And at least 5% annual dividend growth.
Our growth plan as shown on slide 6.
We continue to plan for capital investments of more than $3 billion through 2025, we expect earnings growth to be driven by a robust capital plan to serve customers incremental project opportunities and.
In other earnings drivers that add margin with little or no capital investment.
And our electric utilities business, we are evaluating our transmission needs to develop expanded access to power markets and the cost effectively serve loads across our electric utilities.
We also see opportunity to serve growing load in our prime data center market in Cheyenne Wyoming.
Look forward to engaging our regulators regarding these potential transmission opportunities are.
Our initial modeling leaves us to believe interconnecting, our 3 electric systems of expanding power market access would benefit our customers and shareholders. While also supporting our long term emissions reduction goals.
In addition, we're exploring the potential for responsibly, adding more renewable generation.
Pursuing additional renewable natural gas projects across our agriculture heavy service territories.
Currently have a long list of potential renewable natural gas interconnect projects and while our existing RMG business is relatively modest R&D represents an interesting sustainability of perhaps longer term financial opportunity.
We're very optimistic about population migration into our service territories, both of our electric and gas utilities service territories are seeing accelerating customer growth and we continue to see evidence of firming customer growth trends.
As we noted in our press release yesterday, we set new all time low peaks in July at our South Dakota, and Wyoming Electric utilities.
Finally, we are advancing our culture to be better every day through cultivating innovative solutions and leveraging technologies and data analytics as we encourage our team to find ways to serve our customers with more efficient and effective processes.
Before I leave the slide let me point out that we typically refresh of our 5 year capital plan during our third quarter earnings release in November. The then at our year end earnings release, we had a year to maintain a 5 year capital forecast.
Moving to slide 7 as.
As I said earlier on June 30, we submitted our integrated resource plan for electric systems in South Dakota, and Wyoming. The resource plan model the variety of scenarios with the objective of accomplishing for goals for.
First serve our growing customer demand for electricity.
<unk> utilized resources that are cost effective third maintain strong reliability and finally achieve our environmental goals as set forth in our ESG initiatives.
Our preferred plan proposes to add 100 megawatts of new renewable generation.
Evaluate the addition of up to 20 megawatts of battery storage to help maintain reliability.
And evaluate and develop new transmission opportunities.
In addition, the plan proposes to convert our 90 megawatt nielsen's into coal fire power plant to natural gas in 2025 of the end of its engineered life.
This option helps provide system resiliency demonstrates our continued support of the locally based energy economy and supports our emission reduction goals.
In addition to our resource plan, we're supporting research to advance the emissions reducing technologies the.
Of the funding for a feasibility study for of hydrogen pilot project. We proposed was recently approved by the Wyoming Energy Authority and the University of Wyoming Energy Research Council the.
The feasibility study will examine the viability of using hydrogen and natural gas generation.
We're also supporting the University of Wyoming Research program for turbine firing technologies that would further reduce emissions.
As these technologies advance future options for our generation resources will only continue to expand and in turn allow us to continue to cost effectively and responsibly reduce our emissions.
Specifics about the pilot project and the associated capital necessary to execute our recently submitted resource plan are still in the early stages of evaluation.
As we work with regulators through the review of the resource plan and gain greater clarity on project specifics, we will provide estimates on potential incremental additions to our capital plan.
Any new generation of investment would be incremental to our current capital plan. We have included some transmission investment in our existing capital forecast, but there may be incremental opportunities.
Moving to slide 8 we continue to make progress from an environmental social and governance or ESG perspective, we're taking a.
Our responsible approach to reducing our emissions with goals to reduce emissions intensity for our electric operations of 40% by 2030 and 70% by 2040 off of 2005 based on volume.
For our gas utilities, we're targeting of 50% reduction by 2035 and have voluntarily committed to reducing methane emissions with our participation of the EPA methane challenge and the 1 future of coalition.
We have of legacy of prioritizing ESG issues, and we're working to Holistically communicate the story as we continually enhance our disclosures.
During August we will publish new disclosures for the sustainability accounting standards board and the natural gas sustainability initiatives.
We will also assume publish our 2020 corporate sustainability report and updated AG and the EI quantitative reports I encourage you to visit our Investor website and review of these materials once they are published.
And finally on slide 9 we are well positioned as an integrated utility with a strong long term growth outlook.
We're executing our customer focused strategy and are confident in our future.
I'll now turn it over to rich for the financial update rich.
Thanks, Lynn and good morning, everyone Slide 11 summarizes earnings per share for the second quarter, we delivered EPS as adjusted of 40, <unk> compared to 33 <unk> in Q2.2020 of 21% increase.
Overall strong financial results were driven by new rates and rider revenues and recovery of wholesale power margins at our utilities higher gross margins were partially offset by increases in O&M and DD&A and interest expense.
Weather was not a major driver of earnings during the non peak second quarter for both of our electric and gas utilities. The net benefit to earnings from weather was 1 per share compared to normal and <unk> <unk> below the second quarter last year.
Slide 12 illustrates the detailed drivers of change in net income quarter over quarter. All amounts listed on the slide our after tax.
As I noted on the previous slide the main drivers compared to last year were $9.2 million of gross margin improvement from new rates and riders and recovery of wholesale power margins at our utilities.
O&M increased due to higher employee costs and outside services planned power plant maintenance related expenses and operating expenses for new wind generation.
The improvement in other income expense over the prior year was driven by lower retirement benefit service costs and market impacts on non qualified deferred compensation expense.
The additional quarter over quarter tax benefits of $4.3 million on the far right of the slide were primarily from 2 items first Nebraska.
Catching jobs act customer Bill credits, which reduced gross margins collected from customers and reduced income tax expense by the same amount and.
And second increased flow through tax benefits related to repairs and certain indirect costs.
Additional second quarter detail on segment earnings can be found in the appendix and you can also find additional details on year over year changes in gross margin and operating expenses in yesterday's earnings release.
As we promised last quarter, we made progress on mitigating winter storm <unk> impact on earnings.
The first quarter net impact from storm area was $12.5 million or <unk> 15 per share as.
As we told you then we plan to offset approximately <unk> of these costs through regulatory actions and ongoing power marketing opportunities, we delivered <unk> of the offsets in the second quarter and we anticipate achieving the other 2 <unk> through the remainder of the year.
And we are on plan to mitigate the remaining 10% net storm year impact your O&M management and other opportunities.
Slide 13 shows the details of our recent regulatory activity in Kansas, We filed our first rate review in more than 7 years, including a request to renew our existing 5 year systems safety and integrity investment rider.
In Iowa, we filed our first rate review in more than a decade.
Including the request for a new systems safety and integrity investment rider.
And I'll note that in Iowa interim rates took effect in June.
And we continue to make progress on our rate review filed for Colorado gas we.
We expect all 3 of these rate reviews to conclude late this year or early next year with new rates effective in Q1.2022.
Looking forward, we are tentatively planning to submit rate reviews for Arkansas gas in the fourth quarter of this year and for Wyoming electric in mid 2022.
And as previously noted we are making progress on our storm year recovery plans all of our recovery applications have been filed and we already received final approval and commenced the recovery in Nebraska and South Dakota.
With interim rates in place in Arkansas and Iowa.
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 June we had more than $500 million of available liquidity on our revolving credit facility and.
And in July we amended and extended our revolving credit facility with similar terms through July 2026.
We expect to finalize our refinancing strategy for the $600 million balance on our term loans in the third quarter, we are evaluating refinancing options that align with our anticipated recovery period.
The weighted average length of the recovery requested in our regulatory plans is 3.7 years.
New debt and deferred recovery of fuel cost for stone of near a temporarily increased our debt to total capitalization ratio to 62% at the end of March and it remained at that level at the end of June as.
As we recover storm costs repaid debt and execute on our equity program, we expect to reduce our debt to total capitalization ratio and we continue to target.
Debt to total cap ratio in the mid fifties.
During the second quarter, we issued $40 million through our aftermarket equity offering program or equity issuance expectations are still of 100 million to of $120 million for 2021.
60 million to $80 million for 2022.
Moving to our dividend on slide 15 in 2020, we probably marked 50 consecutive years of annual dividend increases 1 of the longest track records in our industry.
Since 2016, we've increased our dividend at an average annual rate of 6.6%.
And 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're pleased with our strong second quarter financial results and the progress we've made during the quarter on many fronts and.
And we're excited about our growth opportunities with accelerating population migration into our service territories and many opportunities to continue to develop our strong capital program.
We continue to be well positioned both operationally and financially to be ready to serve all our stakeholders.
And with that were available to take your questions.
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 1 on your Touchtone telephone.
For your question has been answered or you wish to withdraw your question.
Press the pound key.
Dan.
Press Star 1 to ask the question. Please standby for your first question.
Your first question comes from the line of Brian Russo with Sidoti. Your line is now open.
Yes, hi, good morning.
Good morning.
Hey on the ERP that was filed.
<unk> what needs to happen for you to.
The improvement implement and execute on the preferred plant that you mentioned earlier.
Thanks for the question Brian This is Lynn.
And the Wyoming and South Dakota, the 2 states that we have filed the IRB.
In South Dakota, it's submitted as information essentially only in Wyoming.
They will have a review on comment period of review and comment hearing they don't necessarily approve the ERP.
So anything that we would want to do and have suggested through our IOP to add generation transmission pipeline et cetera, each would be done through a CPC and replication request in Wyoming and South Dakota, It's of Prudency review of frankly after it's been constructed.
So it's fairly simple IRB process most of the work comes through the the CPC and process, allowing us to then build those assets Brian.
Okay.
Great and then the <unk>.
Free.
The projects that you outlined 100 megawatts of renewables the Sim.
And.
Our coal to gas and the battery storage based on the cost estimates and range is provided in the IOP.
It looks like it could be anywhere between $125 million to $150 million of par.
Possible investment is that.
Accurate.
Youre within the right range, yes.
Each 1 of these need to be proven up individually on separately. If you will none of our current capital forecast includes any generation opportunities in it so it would be incremental to the forecast we put out there thus far Brian we have however put a little bit of the transmission investment into our capital forecast that would be represented in the IRR.
We have pretty good confidence that we're going to be able and need to construct that transmissions, we begin to layer it in but not all of it's layered in at this point.
Yes.
A follow up on transmission there was a lot of discussion in the IRT about new transmission for.
For reliability.
Et cetera could you just elaborate on that which is outside of the preferred plan. So I assume it's more longer term in.
In nature.
The relative to longer term in nature, but.
Within the next several years, we have of kind.
Kind of an objective or goal, where we could connect are for generation sites in Gillette rapid city, Cheyenne and Pueblo, Colorado, We think by doing that we can lower our cost improve reliability improved resiliency and again as I just said more promised importantly, perhaps lower our customers cost through that and then provide us.
The then to perhaps add more renewables in an effective way that would help us with both the resiliency and reliability.
Yes.
Okay in regards to the positive.
Customer growth Youre, seeing whats driving that growth and what jurisdictions is that gross.
Concentrated in and when you look at rate cases.
Possible that the load growth in those jurisdictions can allow you to delay rate cases.
Yes. Good question, let me I'll start out with the high level question and I'll ask rich to maybe fill in some of the figures. The numbers. We are seeing nice population growth and frankly throughout all of our territory.
Some of the areas that are especially meaningful our northwest Arkansas continue to see great growth, we see great gross on the front range of Colorado and here in rapid city, but again, we're seeing growth across the whole of the whole footprint, if you will and for.
In fact, if you annualized growth for the first 6 months of this year, it's about double the rate that we were seeing in 2019. So it's been very interesting to watch we're watching to see how sustainable it is but it's certainly having an impact on our load as you saw the may remember as I said in the comments a few moments ago, we did set new peaks in July.
<unk> of both the Wyoming Electric and South Dakota Electric and they were significant increases in those peaks by nearly 5% year over year.
So we think what's driving it is largely maybe the virus people looking for perhaps more rural communities smaller communities et cetera.
But we're just seeing the large migration into our service territories rich on the head of the yes, I can add a little color I think you hit the jurisdiction is pretty well in but if you look at our electric utilities, our 3 electric utilities kind of historic customer growth there has been about 8%.
We saw that start to accelerate particularly in 2020 in the first half of this year. The run rate. This year is about 1.6%. So as Linn noted about double what we've seen in the past and at the gas utilities.
Our historic growth is more in the kind of 1 to 1 of the 1% range.
And we saw that start to pick up last year and this year. The run rate again is about 1.6%. So we're really encouraged.
With these trends in the appear to have some staying power of time will tell but it certainly looks awful good right now.
Okay, Great and then just on the.
Let the leverage.
Obviously above 60% now due to the gas cost debt.
<unk>.
How long do you think it will take you to get back down to the mid 50% range.
Yes the.
The kind of the way we filed the storm Yuri recovery requests.
It comes out to about a 3.7 year weighted average to get those all recovered.
It is of little front end loaded, though so I think.
Assuming approval of all of those which we fully expect.
You'll see that start to happen fairly quickly in 2022 and 2023.
We prior to storm here, we were targeting being to that mid <unk> range.
And a couple of years pre Yuri is probably going to take more of like 3 to 4 years now to get there Brian with the with the recovery period of those unit costs.
Okay, great. Thank you very much.
Thanks.
Thank you our net.
Next question comes from the line of Brandon Lee with let's say low your line is now open.
Hey, rich.
Good morning quick question.
Theme of the quarter has been on acceleration of de Carbonization is that something that black hills of looking into and if so can you discuss the kind of impact.
Yes, it's we've put out some ESG goals that I mentioned in my comments, a few moments ago and so we're very focused on those.
We're focused not only on carbon reduction, but also of greenhouse gas reduction across our regulated utilities across our natural gas utilities and the electric as you heard for about our ERP. We're also wanting to add on at least the 100 megawatts of renewables to our free to our generation.
Fleet.
We're being very careful though to make sure that we're also focused on cost for customers.
We're very focused on reliability and resiliency, especially as we see the capacity in the west begin to close.
For example, we are selling power this summer and into the fall and triple digits for peak peak low periods and I believe that's because so many utilities are now really relying upon the energy market not so much in the head don't have quite the capacity that we probably ought to have so we're watching that very closely as we make the.
This transition is why we're focused on fuel switching with the Neil Simpson 2 plant. We mentioned on the question before migrating that from coal or at least our suggestion is to the commission we migrate debt from coal to natural gas, we still support the local energy and <unk>.
The economy.
Also making sure we have that resiliency have that capacity available for those storm <unk> and things of that nature.
Great and then just another quick question on <unk>.
<unk> to equity.
Is that can you discuss the timing is that kind of the hot money.
In the year or are you going to be more opportunistic throughout the year.
Yes.
As you saw on our release yesterday, we did $40 million of this year of $100 million to $120 million in the second quarter. So you would expect the rest of this year to just kind of play out through the course of the year on the ATM.
For modeling purposes, I would assume kind of an even spread of debt equity need next year through throughout the year, no front end load or anything like that.
Okay, Great. That's all I had thanks a lot.
Thanks Brandon.
Thank you again to ask a question. Please press star 1.
Our next question comes from the line of Chris Allen Hoff with Siebert Williams.
Your line is open.
Hey, guys.
So are you.
The IRB process, what's your expected timeline on on approval.
Well again, we don't have approval of the ERP of themselves. So we will have hearings relatively soon in terms of reviewing the ERP on the recommendations, we made and I'll get the debt chance for the.
Of the public number had more comment the intervenors things of that nature of of course of the commission and then once we're through that process. Then again, we will start filing for <unk>.
For the generation side, we anticipate we would have to go through rfps to add that generation, probably both South Dakota and Wyoming. However, we're very focused with the commission and making sure that we recognized especially in the aftermath of the storm jewelry and things like that the importance of owning capacity.
The the party has the obligation to serve is running and operating net capacity et cetera. So we will work hard to allow ourselves to have as much of that and ownership for ourselves on for our shareholders. So we think thats the right thing for customers in the long run, but theres a lot of water under the bridge that we will have to work through.
Rich.
At the end of the second quarter have you got an adjusted number absent the year.
The year of costs that are on recovered so far for.
For calendar year 'twenty 1.
Yes.
Would you have been on the on the debt to cap absence of Uri.
I don't know that off the top of my head, Chris, but I would tell you, we probably would've been in the 58% to 59% range.
Okay Thats close enough.
Can you give me a little color on the.
The decline in the non Reg side for the quarter.
Yes, the big thing there really was at power Gen. We had planned outages during the shoulder quarter, when we didn't need the capacity.
That's probably the biggest driver Chris and then at the coal mine, we had a little downtick there as well because also of outage planned outages at.
At the coal mine, so we delivered less coal.
Okay.
You talked a little bit about seeing opportunities and RMG have you got any sense of when we might hear about.
A little bit more detail on your plan there.
Yes, we're working that pretty aggressively Chris.
We have for projects in place and have had those in place for a while so we're learning from those.
We've got another 6 to 10 that we're now currently negotiating and then we've got a fairly long backlog of possibilities are focus.
To date has been ensuring that we can build pipeline and transmission systems to the <unk>.
Horses, we're also looking at the other opportunities of course, we serve the gut.
Thousands and thousands of miles of pipe. The Cros are primarily agriculture oriented economies, we've got lots of great potential customers et cetera. So.
We're still learning very early stages, it's still relatively expensive as well.
But it depends on what kind of solutions. We're looking for we're looking for economic solutions or we're looking for emission solutions in.
Over time, perhaps because we're looking for emission solutions of the economics start to make more sense on prices begin to come down as we get smarter et cetera. So we're in early stages, but we do have of committed team. That's looking at this very carefully thinking about the opportunities and then making sure we're capturing them as quickly as we can.
Okay. Thanks for the details I appreciate it.
Chris.
Thank you.
No further questions I will turn the call back from the Linn Evans for closing remarks. Please go ahead, Sir well. Thank you very much let me close by saying Thank you for your interest in Black Hills.
We're already of hard work on Q3 and greatly appreciate the Black Hills team on how focus we have been on O&M savings, while still hitting our metrics with respect of great customer service and safety, especially just great. Thanks to our team.
I ask all of you please be safe stay well, we'll look forward to next quarter take care.
Thank you for your participation in today's conference. This concludes the presentation you may now disconnect good day.
[music].
And then.
[music].
[music].
[music].
Good day, ladies and gentlemen, and welcome to the Black Hills Corporation second quarter 'twenty to 'twenty..1 earnings Conference call. My name is Sarah and I will be your coordinator for today.
At this time all participants are in a listen only mode. Following the prepared remarks there'll be a question and answer session. If you would like to participate in this portion of the call. Please press star followed by 1 at any time during the conference. If assistance is needed at any time during the call. Please press star followed by zero and the.
Coordinator will be happy to assist you.
As a reminder of this conference call is being recorded for replay purposes, I would now like to turn of the presentation over to Mr. Jerome Nichols director of Investor Relations at Black Hills Corporation.
Please proceed sir.
Thank you Guy and good morning, everyone.
Welcome to Black Hills Corporation's second 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, Avon's, President and Chief Executive Officer and.
And rich Kinsley, 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.
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 2 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 I.
I will now turn the call over to Lynn Evans.
Jerome Good morning, everyone and thank you for joining us today I'll begin on slide 4 which lists our key achievements during the second quarter.
Our team delivered strong financial results with earnings up 21% compared to last year.
We also delivered solid operational performance was strong execution of our capital plan.
And we made excellent progress on our regulatory initiatives, including storm Euro of expense recovery actions.
After safety 1 of our key operational priorities is providing reliable and resilient service to our customers.
During the record breaking heat in June across the Western United States of the Black Hills team and our electric systems and generating fleet performed exceptionally well.
This was our second consecutive quarter that included the extreme weather events in our energy delivery systems performed as designed.
During both quarters, our diverse mix of power generation resources in a reliable and dispatch will generation capacity allowed us to serve customers and avoid rolling blackouts and other emergency actions that were required in other parts of the country.
The Black Hills team continued to execute our capital investment plan to maintain our enviable reliability of the system resiliency and to serve our growing communities. We're on track to deploy up to $647 million of capital for the year.
We continue to evaluate and develop new opportunities beyond 2021.
On the regulatory front, we had a very productive quarter as we said we would do we filed rate reviews in Colorado, Iowa, and Kansas and Colorado. We recently received approval for a new safety focused investment rider for our gas utilities.
And on June 30, we submitted our electric integrated resource plan for our South Dakota, and Royal and the utilities, which I will discuss in more detail at the moment and then rich will cover regulatory activity of more detail in his update.
Slide 5 lays out our financial outlook, we affirmed our 2021 earnings guidance based on strong second quarter financial performance. We also maintain our 2022 earnings guidance range.
We are targeting 5% to 7% earnings growth for 2023 through 2025.
And at least 5% annual dividend growth.
Our growth plan as shown on slide 6.
We continue to plan for capital investments of more than $3 billion through 2025, we expect earnings growth to be driven by our robust capital plan to serve customers incremental project opportunities in other earnings drivers that add margin with little or no capital investment.
And our electric utilities business, we are evaluating our transmission needs to develop expanded access to power markets and the cost effectively serve loans across our electric utilities.
We also see opportunity to serve growing low than our prime datacenter market in Cheyenne, Wyoming, we look forward to engaging our regulators regarding these potential transmission opportunities are.
Our initial modeling leaves us to believe the interconnecting our 3 electric systems of expanding power market access with benefit of our customers and shareholders. While also supporting our long term emissions reduction goals.
In addition, we're exploring the potential for responsibly, adding more renewable generation.
Pursuing additional renewable natural gas projects across our agriculture heavy service territories with <unk>.
Currently have a long list of potential renewable natural gas interconnect projects and while our existing RMG business is relatively modest R&D represents an interesting sustainability of perhaps longer term financial opportunity.
We're very optimistic about population migration into our service territories, both of our electric and gas utilities service territories are seeing accelerating customer growth and we continue to see evidence of firming customer growth trends.
As we noted in our press release yesterday, we set new all time low peaks in July at our South Dakota, and Wyoming Electric utilities.
Finally, we are advancing our culture to be better every day through cultivating innovative solutions and leveraging technologies and data analytics as we encourage our team to find ways to serve our customers with more efficient and effective processes.
Before I leave the slide let me point out that we typically refresh of our 5 year capital plan during our third quarter earnings release in November. The then at our year end earnings release, we add of year to maintain a 5 year capital forecast.
Moving to slide 7.
As I said earlier on June 30, we submitted our integrated resource plan for our electric systems in South Dakota, and Wyoming. The resource play on model of variety of scenarios with the objective of accomplishing for goals first serve our growing customer demand for electricity.
<unk> utilized resources that are cost effective third maintained strong reliability and finally achieve our environmental goals as set forth in our ESG initiatives.
Our preferred plan proposes to add 100 megawatts of new renewable generation.
The evaluate the addition of up to 20 megawatts of battery storage to help maintain reliability.
And evaluate and develop new transmission opportunities.
In addition, the plan proposes to convert our 90 megawatt Nielsen's 2 coal fired power plant to natural gas in 2025 of the end of its engineered life.
This option helps provide system resiliency demonstrates our continued support of the locally based energy economy and supports our emission reduction goals.
In addition to our resource plan, we're supporting research to advance the emissions reducing technologies the.
The funding for a feasibility study for a hydrogen pilot project. We proposed was recently approved by the Wyoming Energy Authority and the University of Wyoming Energy Research Council the.
The feasibility study will examine the viability of using hydrogen and natural gas generation.
We're also supporting the University of Wyoming Research program for turbine firing technologies that would further reduce emissions.
As these technologies advance future options for our generation resources will only continue to expand and in turn allow us to continue to cost effectively and responsibly reduce our emissions.
Specifics about the pilot project and the associated capital necessary to execute our recently submitted resource plan are still in the early stages of evaluation.
As we work with regulators through the review of the resource plan and gain greater clarity on project specifics, we will provide estimates on potential incremental additions to our capital plan.
Any new generation of investment would be incremental to our current capital plan. We have included some transmission investment in our existing capital forecast, but there may be incremental opportunities.
Moving to slide 8 we continue to make progress from an environmental social and governance or ESG perspective.
We're taking a responsible approach to reducing our emissions with goals to reduce emissions intensity for our electric operations of 40% by 2030, and 70% by 2040 off of 2005 base volume.
For our gas utilities, we're targeting of 50% reduction by 2035 and have voluntarily committed to reducing methane emissions with our participation of the EPA methane challenge and the 1 future coalition.
We have of legacy of prioritizing ESG issues, and we're working to Holistically communicate the story as we continually enhance our disclosures.
During August we will publish new disclosures for the sustainability accounting standards board and the natural gas sustainability initiatives.
We will also assume publish our 2020 corporate sustainability report and updated HCA and <unk> quantitative reports I encourage you to visit our Investor website and review of these materials once they are published.
And finally on slide 9 we are well positioned as an integrated utility with a 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 rich.
Thanks, Lynn and good morning, everyone Slide 11 summarizes earnings per share for the second quarter, we delivered EPS as adjusted of <unk> 40, <unk> compared to 33 <unk> in Q2.2020 of 21% increase.
Overall strong financial results were driven by new rates and rider revenues and recovery of wholesale power margins at our utilities higher gross margins were partially offset by increases in O&M and DD&A and interest expense.
Weather was not a major driver of earnings during the non peak second quarter for both of our electric and gas utilities. The net benefit to earnings from weather was 1 per share compared to normal and <unk> <unk> below the second quarter last year.
Slide 12 illustrates the detailed drivers of change in net income quarter over quarter. All amounts listed on this slide our after tax.
As I noted on the previous slide the main drivers compared to last year were $9.2 million of gross margin improvement from new rates and riders and recovery of wholesale power margins at our utilities.
O&M increased due to higher employee costs and outside services planned power plant maintenance related expenses and operating expenses for new wind generation.
The improvement in other income expense over the prior year was driven by lower retirement benefit service costs and market impacts on nonqualified deferred compensation expense.
The additional quarter over quarter tax benefits of $4.3 million on the far right of the slide were primarily from 2 items first Nebraska tax cuts and jobs Act customer Bill credits, which reduced gross margins collected from customers and reduced income tax expense by the same amount and.
The second increased flow through tax benefits related to repairs and certain indirect costs.
Additional second quarter detail on segment earnings can be found in the appendix and you can also find additional details on year over year changes in gross margin and operating expenses in yesterday's earnings release.
As we promised last quarter, we made progress on mitigating winter storm <unk> impact on earnings.
The first quarter net impact from storm the area was $12.5 million or <unk> 15 per share as.
As we told you then we planned to offset approximately <unk> of these costs through regulatory actions and ongoing power marketing opportunities, we delivered <unk> of the offsets in the second quarter and we anticipate achieving the other 2 <unk> through the remainder of the year.
And we are on plan to mitigate the remaining 10% net storm year impact your O&M management and other opportunities.
Slide 13 shows the details of our recent regulatory activity in Kansas, We filed our first rate review in more than 7 years, including a request to renew our existing 5 year systems safety and integrity investment rider.
In Iowa, we filed our first rate review in more than a decade, including a request for a new systems safety and integrity investment rider.
And I'll note that in Iowa interim rates took effect in June.
And we continue to make progress on our rate review filed for Colorado gas. We expect all 3 of these rate reviews to conclude late this year or early next year with new rates effective in Q1.2022.
Looking forward we are 10.
Tentatively planning to submit rate reviews for Arkansas gas in the fourth quarter of this year and for Wyoming electric in mid 2022.
As previously noted we are making progress on our storm year recovery plans.
All of our recovery applications have been filed and we already received final approval and commenced recovery in Nebraska and South Dakota.
With interim rates in place in Arkansas and Iowa.
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.
At the end of June we had more than $500 million of available liquidity on our revolving credit facility and.
And in July we amended and extended our revolving credit facility with similar terms through July 2026.
We expect to finalize our refinancing strategy for the $600 million balance on our term loan in the third quarter, we are evaluating refinancing options that align with our anticipated recovery period.
The weighted average length of recovery requested in our regulatory plans is 3.7 years.
New debt and deferred recovery of fuel cost for storm near a temporarily increased our debt to total capitalization ratio of 62% at the end of March and it remained at that level at the end of June as.
As we recover storm costs repaid debt and execute on our equity program, we expect to reduce our debt to total capitalization ratio and we continue to target.
Debt to total cap ratio in the mid fifties.
During the second quarter, we issued $40 million through our aftermarket equity offering program or equity issuance expectations are still of $100 million to $120 million for 2021.
60 million to $80 million for 2022.
Moving to our dividend on slide 15 in 2020, we proudly marked 50 consecutive years of annual dividend increases 1 of the longest track records in our industry.
Since 2016, we've increased our dividend at an average annual rate of 6.6%.
And 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're pleased with our strong second quarter financial results and the progress we've made during the quarter on many fronts and.
And we're excited about our growth opportunities with accelerating population migration into our service territories and many opportunities to continue to develop our strong capital program.
We continue to be well positioned both operationally and financially to be ready to serve all our stakeholders.
And with that we're available to take your questions.
Ladies.
Ladies and gentlemen.
We are ready to open the lines for your questions.
Do you wish to ask a question. Please press star followed by 1 on your Touchtone telephone.
If your question has been answered or you wish to withdraw your question.
Press the pound key.
Dan.
The press Star 1 to ask the question. Please standby for your first question.
The first question comes from the line of Brian Russo with Sidoti. Your line is now open.
Yes, hi, good morning.
Good morning.
Hey on the <unk> that was filed.
The seasonally what needs to happen for you to.
The improvement implement and execute on the preferred plant that you mentioned earlier.
Thanks for the question Brian This is Lynn.
And the Wyoming and South Dakota, the 2 states that we have filed the IOP of.
In South Dakota, it's submitted as information essentially only in Wyoming. They will have a review on comment period of review and comments hearing they don't necessarily approve the AARP.
So anything that we would want to do and have suggested through our IOP to add generation transmission pipeline et cetera, each would be done through a CPC and replication request in Wyoming and South Dakota at the Prudency review frankly after it's been constructed.
So it's a fairly simple IRB process most of the work comes through the the CPC and process, allowing us to then build those assets Brian.
Okay.
Great and then the <unk>.
Free.
The projects that you outlined the hundred megawatts of renewables the Sim.
And.
Yes.
Our coal to gas and the battery storage based on the cost estimates and ranges you provided and the IOP.
It looks like it could be anywhere between $125 million to $150 million of <unk>.
Possible investment is that.
Accurate.
Youre within the right range, yes.
Each 1 of these needs to be proven up individually on separately. If you will on none of our current capital forecast includes any generation opportunities in it. So there would be incremental to the forecast we put out there thus far Brian we have however put a little bit of the transmission investment into our capital forecast that would be represented in the IRB.
We have pretty good confidence from that we're going to be able and need to construct that transmissions, we begin to layer it in but not all of it's layered in at this point.
Yes.
A follow up on transmission there was a lot of discussion in the IRT about new transmission for.
For reliability.
Et cetera could you just.
Elaborate on that which is outside of the preferred plan. So I assume that's more longer term in.
In nature.
On the relatively longer term in nature, but.
The within the next several years, we have have of.
Kind of an objective of our goal where we could connect are for generation sites in Gillette rapid city, Cheyenne and Pueblo, Colorado, We think by doing that we can lower our cost improve reliability improved resiliency and again as I just said more most importantly, perhaps lower our customers cost through that and then provide us.
Other than to perhaps add more renewables in an effective way that would help us with both resiliency and reliability.
Yes.
Okay in regards to the positive.
Customer growth Youre seeing whats.
What's driving that growth and what jurisdictions is that gross.
Concentrated in and.
When you look at rate cases.
Possibly that the load growth in those jurisdictions.
Then allow you to.
Rate cases.
Yes. Good question, let me I'll start out with the high level question and I'll ask rich to maybe fill in some of the figures of numbers.
We are seeing nice population growth and frankly throughout all of our territory.
Some of the areas that are especially meaningful our northwest Arkansas continue to see great growth, we see great gross on the front range of Colorado and here in rapid city, but again, we're seeing growth across the whole of the whole footprint. If you will in fact, the if you annualized growth for the first 6 months of this year, it's about double.
On the rate that we were seeing in 2019. So it's been very interesting to watch we're watching to see how sustainable it is but it's certainly having an impact on our load as you saw of May remember as I said in our comments a few moments ago. We did set new peaks in July of both the Wyoming Electric and South Dakota electric and they were <unk>.
Difficult increases on those peaks by nearly 5% year over year, so with the.
What's driving it is largely maybe the virus people looking for perhaps more rural communities smaller communities et cetera, but we're just seeing the large migration into our service territories rich on the head of the yes, I can add a little color I think you hit the jurisdiction is pretty well in but if you look at our electric utilities, our 3 electric utilities.
<unk> kind of historic customer growth there has been about 8%.
We saw that start to accelerate particularly in 2020 in the first half of this year. The run rate. This year is about 1.6%. So as Linn noted about double what we've seen in the past and at the gas utilities.
Our historic growth is more in the kind of 1 to 1 of the 1% range.
And we saw that start to pick up last year and then this year. The run rate again is about 1.6%. So we're really encouraged.
With these trends in the appear to have some staying power and all the time will tell but it certainly looks awful good right now.
Okay, Great and then just on the.
I'll, let the leverage.
Obviously above 60% now.
For the gas cost.
Debt.
How long do you think it'll take you to get back down to the mid 50% range.
Yes the.
Kind of the way, we filed the storm Yuri recovery requests.
Comes out to about a 3.7 year weighted average to get those all recovered.
It is of little front end loaded, though so I think.
Assuming approval of all of those which we fully expect.
Youll see that start to happen fairly quickly in 2022 and 2023.
We prior to storm, Yuri we were targeting being to that mid <unk> range.
And a couple of years pre Yuri is probably going to take more of like 3 to 4 years now to get there Brian with the with the recovery period of those <unk> costs.
Okay, great. Thank you very much.
A few banks.
Thank you. Our next question comes from the line of Brandon Lee with Mizuho. Your line is now open.
Hey, rich.
Good morning quick question.
The theme of the quarter has been on acceleration of de Carbonization is that something that Black hills is looking into and if so can you discuss the opportunity there.
Yes, it's we've put out some ESG goals that I mentioned in my comments, a few moments ago and so we're very focused on those.
We're focused not only on carbon reduction, but also of greenhouse gas reduction across our regulated utilities across our natural gas utilities and the electric as you heard for about our IOP. We're also wanting to add to the at least the 100 megawatts of renewables to our to our generation.
Fleet.
We're being very careful though to make sure that we're also focused on cost for customers.
We're very focused on reliability and resiliency, especially as we see the capacity in the west begin to close.
For example, we are selling power this summer and into the fall and triple digits for peak power.
Low periods and I believe that's because so many utilities are now really rely on upon the energy market not so much had don't have quite the capacity that we probably ought to have so we're watching that very closely as we make this transition and that's why we're focused on fuel switching with the Neil Simpson 2 plant we mentioned on the question before.
Migrating that from cole of at least our suggestion is with to the commission, we migrate debt from coal to natural gas, we still support the local energy.
Fuel economy also making sure we have that resiliency have that capacity available for those storm <unk> and things of that nature.
Yes.
Great and then just another quick question on <unk>.
<unk> to equity.
Is that can you discuss the timing is that kind of be front loaded in.
In the year or are you kind of being more opportunistic throughout the year.
Yes.
As you saw on our release yesterday, we did $40 million of this year of $100 million to $120 million in the second quarter. So you would expect the rest of this year to just kind of play out through the course of the year on the ATM I would for modeling purposes I would assume.
Kind of an even spread of debt equity need next year through throughout the year, no front end load or anything like that.
Okay, Great. That's all I had thanks a lot.
Thanks, Brandon Thanks Bren.
Thank you.
Again to ask a question please press star 1.
Our next question comes from the line of Chris Allen Hoff with Siebert Williams.
Your line is open.
Hey, guys.
Yes.
The ERP process, what's your expected timeline on on approval.
Well again, we don't have approval of the ERP of themselves will have the hearings relatively soon in terms of reviewing the ERP on the recommendations, we made and I'll get the debt of chance for the.
The other public <unk> had more comment the intervenors things of that nature of of course of the commission and then once we're through that process. Then again, we will start filing for <unk>.
For the generation side, we anticipate we would have to go through rfps to add that generation, probably both South Dakota and Wyoming. However, we're very focused with the commission.
And making sure that we recognized especially in the aftermath of the storm jewelry and things like that the importance of owning capacity. The party has the obligation to serve is running and operating net capacity et cetera. So we'll work hard to allow ourselves to have as much of that and ownership for ourselves on for our shareholders. So we think thats the right thing for customers.
On the long run.
But theres a lot of water under the bridge that we will have to work through.
Rich.
At the end of the second quarter have you got an adjusted number absence of Yuri.
<unk> costs that are on recovered so far.
For calendar year 'twenty 1 yes.
Or would you have been on the on the debt to cap absence of Uri.
I don't know that off the top of my head, Chris, but I would tell you, we probably would've been in the 58% to 59% range.
Okay, that's close enough.
Can you give me a little color on the.
The decline in the non Reg side for the quarter.
Yes, the big thing there really was at power Gen. We had planned outages during the shoulder quarter, when we didn't need the capacity.
That's probably the biggest driver Chris and then at the coal mine, we had a little downtick there as well because also of outage planned outages at.
At the coal mine, so we delivered less coal.
Okay.
You talked a little bit about seeing opportunities in our LNG have you got any sense of when we might hear about.
A little bit more detail on your plan there.
Yes, we're working that pretty aggressively Chris.
We have for projects in place and have had those in place for a while so we're learning from those.
We've got another 6 to 10 that we're now currently negotiating and then we've done a fairly long backlog of possibilities our focus.
To date has been ensuring that we can build pipeline and transmission systems to the sources. We're also looking at other opportunities of course, we serve the got it.
Thousands and thousands of miles of pipe the.
Across our primarily agriculture oriented economies, we've got lots of great potential customers et cetera. So.
We're still learning very early stages, it's still relatively expensive as well.
But it depends on what kind of solutions. We're looking for we're looking for economic solutions or we're looking for emission solutions over.
Over time, perhaps because we're looking for emission solutions of the economic start to make more sense and prices begin to come down as we get smarter et cetera. So.
We're in early stages, but we do have of committed team. That's looking at this very carefully thinking about the opportunities and then making sure we're capturing them as quickly as we can.
Okay. Thanks for the details I appreciate it.
Chris.
Thank you.
No further questions I will turn the call back to the Linn Evans for closing remarks. Please go ahead, sir well thank.
Thank you very much let me close by saying Thank you for your interest in Black Hills, we're already of hard work on Q3 and greatly appreciate the Black Hills team on how focus we have been on O&M savings, while still hitting our metrics with respect of great customer service and safety, especially just great. Thanks to our team as.
For all of you please be safe stay well, we'll look forward to next quarter take care.
Thank you for your participation in today's conference. This concludes the presentation you may now disconnect good day.