Q1 2022 Black Hills Corp Earnings Call

Thank you for your patience the Black Hills Corporation earnings Conference call will begin shortly again, thank you for standing by.

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Good day, ladies and gentlemen, and welcome to the Black Hills Corporation first quarter 2022 earnings Conference call.

My name is Liz and I will be your coordinator for today.

At this time all participants are in a listen only mode.

Knowing the prepared remarks, there will 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.

Its assistance is needed any time during the call. Please press star followed by zero and a coordinator will be happy to assist you.

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Jerome Nichols director of Investor Relations of Black Hills Corporation. Please proceed sir.

Thank you Liz and good morning, everyone welcome to Black Hills Corporation's first quarter 2022 earnings Conference call.

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 <unk>, 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.

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.

I will now turn the call over to Brian Evans.

Thank you Jerome good morning, everyone and thank you for joining us.

I'll start on slide four of our Investor presentation, which summarizes our performance for the first quarter.

Our team delivered excellent operational and financial performance during the quarter, providing a great start to the year.

Our earnings per share increased 18% year over year with strong contributions from both of our electric and gas utilities, our earnings growth in the first quarter reflects the execution of our regulatory strategy over the last several quarters, including constructive outcomes for three gas rate reviews and storm your cost recovery.

Our financial results also benefited from ongoing customer growth driven by population migration into our service territories and our strong generation fleet availability during the quarter supported profitable off system energy sales that benefited customers and shareholders. Our generation team operates our fleet.

At much higher availability than the industry average, which is a testament to their focus on operational excellence and is key to our top quartile reliability and keeps costs lower for our customers.

As always safety is our top priority as we aspire to be the safest utility in the country.

As an example of our team's safety focus our wire deck mine was recently recognized by achieving core safety certification from the National Mining Association.

<unk> joins only 10 other mines at a more than 500 to meet the strict safety standards.

Our capital plan for the year is on track as we proactively manage through inflation and supply chain challenges, we're prioritizing our projects and adapting our project schedules to address these realities.

Most of our procurement needs for 2022 are already sourced and looking ahead certain equipment items, such as meters and distribution transformers are developing longer lead times and we're collaborating with our supply chain partners to address these challenges.

We also continue to advance our growth and resiliency strategies we.

We have signed a contract with a blockchain customer in Wyoming. The contract includes conditions that must be met by the customer before we provide the energy and we hope to begin delivering energy later this year.

We also continue to evaluate other request for service under a blockchain interruptible service tariff.

Our proposed ready Wyoming transmission project also continues to move along I'll discuss this project further in a moment.

Our financial outlook as listed on slide five which is consistent with our prior disclosures. We continue to anticipate earnings in the range of $3 95.

$4 15 per share for the year.

We also continue to target EPS growth of 5% to 7% for 2023 through 2026 and annual dividend growth of at least 5% during the same period.

Our base capital plan remains at $3 $2 billion over the next five years.

Slide six provides a regulatory update for our current and planned activities.

Our only currently active rate reviews for Arkansas gas, which we filed last December .

We're requesting recovery for more than $220 million of investments and approval for an enhanced safety focused right here the.

The regulatory process continues as expected and we anticipate resolution by year end.

We have nearly completed our regulatory process relative to a recovery of our incremental fuel costs that we experienced during winter storm jewelry. We continue to expect full recovery of the $546 million of extraordinary fuel costs, we incurred during the February 2021 storm.

We're currently recovering at all of our states and we're waiting for final decisions for Arkansas gas in Wyoming gas.

The first quarter of this year, we have recovered $106 million of the $546 million of incremental costs in.

In February we filed for approval of the ready Wyoming project, a proposed 260 mile Electric transmission line in southeast, Wyoming, which is expected to stabilize costs for customers enhance the resiliency of our electric systems and support the local economic health of the Cheyenne region.

The request is moving through the regulatory process and we expect resolution by year end. If approved construction will begin next year and we view ready Wyoming is a win win project for our customers for Wyoming and for our shareholders.

Looking forward, we're preparing to file two rate reviews. This year, we plan to file a rate review for Wyoming Electric by June 1st as required by a prior settlement agreement.

And we also plan to file a rate review later this year for Rocky Mountain natural gas, our intrastate natural gas pipeline in Colorado.

In our natural gas utilities, we plan to file RMG tariffs in three states that will provide customers an option to replace all or a portion of their current natural gas usage with biogas or in renewable natural gas we.

We expect to file in Colorado in May followed by filings in Kansas and Nebraska before August .

Final two items on this slide relate to the resource planning process for our three electric utilities, we submitted a resource plan last year for our jointly operated South Dakota, and Wyoming Electric system. We're preparing for the next steps to add up to 100 megawatts of renewable resources and 20 megawatts of battery storage is identity.

And our preferred plan.

We're also working to finalize and file our clean energy plan for Colorado in the second quarter. This plan supports an 80% reduction in carbon emissions by 2030 off a 2005 base year, which will require the addition of more renewable energy resources.

Slide seven sets our company wide emissions reduction goals for our electric and natural gas segments from a 2005 baseline we've already achieved a 30% reduction in greenhouse gas emissions intensity at our electric utilities, and a 33% reduction in our natural gas utilities, and we're well on track to achieve a cleaner energy.

Profile for the future.

Our updated sustainability report along with our other ESG disclosures, including SaaS.

The Agi <unk> EIA templates and a natural gas sustainability initiative will be published in August .

And for the first time, we will also publish Tcf D disclosures in August .

Moving to slide eight which focuses on our experience with customer growth in the states or jurisdictions, we serve.

The gray bars on this chart display the total population growth over the past three years for the states, we serve and the national average the.

The Orange bars show the customer growth rate for our Black Hills energy jurisdictions during that same period.

Note that the customer growth rates within our service territories are well above each state's average illustrating the overall quality of the jurisdictions, we serve with growth at our Arkansas, Colorado territories remains particularly strong.

Here in rapid city, we were recently listed as the top growing Midwest community and were also ranked as the number one emerging housing market by an index published by the Wall Street Journal Realtor Dot com.

We've also provided our estimated rate base by jurisdiction on this slide.

Slide nine highlights our energy forward initiative, we're fostering sustainable cost savings through innovation and continuous improvement. Our companywide program was focused on ensuring we have processes that allow us to serve customers as effectively and efficiently as possible.

Slide 10 summarizes our long term growth plan, we're confident in our customer focused strategy and the strategic diversity of our electric and gas utilities across our stable and constructive jurisdictions and we're excited about our growth opportunities many of which we've already discussed today.

We're focused on growing long term value for customers and shareholders through our customer focused capital investment program developing incremental projects executing on other opportunities to grow our earnings stream and improving their effectiveness and efficiency as a team.

We remain excited about our growth opportunities and the customer growth in our service territories those factors combined with our energy forward initiative.

Assist us in temporary inflation impacts in delivering our long term growth targets.

That completes my comments and now I will turn it over to rich for the financial update rich.

Thanks, Lynn and good morning, everyone I'll start on slide 13, which shows our first quarter EPS and segment operating income for 2022 compared to 2021, we.

We delivered EPS of $1 82, compared to $1 54 last year as Linn noted, that's an increase of 18%.

Last year's first quarter included a 15 negative impact from winter storm, Yuri and even when adding that 15 since back to 2021 results, we still increased EPS by 8%.

Operating income was up 25% with strong contributions from both our electric and gas utilities.

Slide 14 illustrates the detailed drivers of change in net income year over year for the first quarter all amounts on this slide are after tax.

There are a number of items that drove higher margins year over year and these are detailed in our earnings release yesterday. The key drivers were new rates and rider recovery customer growth strong off system energy sales and mark to market benefits on energy contracts.

Also margins at the electric utilities were higher year over year due to a T. C. J a tax refund at Colorado electric last year, which reduced margin and income taxes by a like amount.

Weather benefited earnings in both Q1, 2022, and Q1 2021 compared to normal weather added <unk> <unk> to EPS this quarter compared to seven <unk> in Q1 2021.

I'll also note that we reported <unk> of EPS in Q1, 2022 from Mark to market accounting on energy contracts, while last year's first quarter had <unk> of negative EPS related to mark to market items.

O&M was higher mainly due to higher cloud computing licensing costs as we move more of this activity from our data centers to the cloud and maintenance expenses unplanned generation outages and property taxes.

DD&A increased due to our capital investment program.

And interest expense increased from higher debt balances, mainly due to the impact from winter storm here.

Additional details on year over year changes in margin and operating expenses are available in yesterday's earnings release and in our 10-Q to be filed later today.

Slide 15 shows our financial position through the lens of capital structure credit ratings and financial flexibility.

We have a manageable debt maturity profile and we're committed to maintaining our solid investment grade credit ratings are.

Our debt to total capitalization ratio improved to 68% down from 62% at year end. Thanks to strong first quarter cash flows and recovery of winter storm Euro costs, we expect to achieve our targeted capital structure of mid Fifty's by late 2023 or early 2024 as our business jet.

<unk> strong cash flows and we recover storm costs repay debt and execute our after market equity offering program.

At the end of April we had over $435 million of available liquidity on our revolving credit facility.

Moving to our dividend on slide 16, we've increased our dividend an average of six 4% annually over the last five years. Our 2021 dividend represented 51 consecutive years of dividend increases one of the longest track records in our industry and a record we're quite proud of.

Looking forward, we anticipate increasing our dividend by more than 5% annually through 2026, as we maintain our 50% to 60% payout target.

In closing our overall financial outlook as illustrated on slide 17 between Lynn's comments in my comments, we've covered the information shown on this slide and with that we'll take 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 one on your Touchtone telephone.

If your question has been answered or you wish to withdraw your question press pound again.

Press Star one to ask a question.

Standby for your first question.

Your first question comes from Julien Dumoulin Smith with Bank of America.

Hey, good morning team can you hear me.

Good morning, Julien here you will thank you how are you.

Alright, well thanks for the time, guys hope you're well listen just wanted to check in first on this jewelry items disclosed.

Just thought process on why it wasn't booked in earnings here in just a little bit more context behind it I haven't seen a lot of discussion in the past just to talk about a little bit more if you can.

Yes, Julien here.

Yes.

Hey, Glenn didn't quite hear the question. He's looking at me Quizzically, So I'll answer it and he can add to it.

We feel like we have merit meritorious defenses against that we plan to appeal.

And at this time there is no.

Nothing recorded as an accrual.

That relates to our disposed black.

Oil and gas company that we disposed of in 2018, so yeah. Good.

Richard's right Julian I'm, sorry, I didn't hear your first phrase of your questions with threw me off but yes, rich answered that very well.

It is.

The operations, we no longer own and operate we.

We were surprised by the jury verdict and we think we have meritorious.

Appeal rights and we're going to pursue those.

Got it Okay fair enough.

And then just keeping going back to the core operations here if I can.

In terms of bitcoin and some of the dynamics there I mean, what are you seeing in terms of follow through on some of this.

Load materializing here again at times, one could argue that there's intrigue.

How much is sort of do you anticipate at this point to be realized if you will.

Are you speaking to there you can still go where you are.

Yes, yes exactly.

Yes.

Remember, we did an RFP early last year had a very very strong response to that because they were getting so many phone calls from potential customers and.

And in response to that RFP was quite strong and then we picked our top couple we have actually negotiated and signed the contract and the agreement with one of those crypto mining customers. There is a condition precedent to that that agreement before we'd start supplying them energy.

We feel confident they'll get that accomplished and then before the end of this year, we'll be supplying.

Energy to them and of course, we are responding to others.

Part of the opportunities that we see with respect to increasing the opportunity to serve in Wyoming.

Additional transmission things of that nature. So we see a pretty strong opportunity for us to serve a pretty doggone, good growing load and frankly, the customers that we're already serving our grilling pretty doggone rapidly and thats going quite well for us.

Got it in fact, maybe if I can clarify the question further as you said you've got you had a lot of respondents here on the RFP.

And as you highlighted here you have a single contract.

Coming out of that.

As you think about perhaps realizing more of those initial respondents.

Is there a timeline there or should we be kind of holding back and waiting a little bit more.

I think we're just we're being very careful to make sure that we high grade the opportunities there.

We want to make sure we have good counterparties that are solid long term customers things of that nature. So that's been our focus so far Julian so we're not in a big hurry, we have plenty of demand so it's about quality.

A lot of the customer power factors things of that nature of that help us maximize the opportunity for customers and shareholders.

Got it alright fair enough well I will leave it there to others. Thank you guys see you soon.

Thank you Julien C C or D J.

Your next question comes from Brandon Lee with Mizuho.

Hey, good morning, rich and win.

Just a couple quick ones.

Given the energy backdrop and the need for more diversified fuel supply are the gas LDC assets more valuable inside the portfolio or are you still potentially evaluating strategic alternatives.

Well as I said this last quarter I think Brandon the best way for me to answer that question as to what's best for customers and shareholders is always paramount to our decision making.

We're constantly evaluating our portfolio and.

The 20 plus years I've been with this organization and we've been very proactive with our moves we've added assets. We've divested assets, we have strategic partners in our assets, especially our generation assets.

So that will always be our long term approach to creating shareholder value.

I think we've proven our track record in that regard, but right now again it would be.

<unk>.

It would be I'd be speculating, if I said anything further than that Brendan.

Sure that's helpful.

Just a.

A quick question on the timing of your equity it seems like you.

Utility stocks have run up.

Gained substantially throughout the year.

Okay, and I guess im a little surprised that you've only done 3 million or $3 $8 million a year 100, let's call it $110 million of equity needs for the year.

Yes, do you have can you just talk about.

Our strategy are you.

Lining that up with.

Capital spending.

Can you just talk about how we should be that the rest of the year.

Yes, the way I would view that Brandon.

<unk>.

You're right stocks have run up.

Utility stocks, but that happened kind of right at the end of the quarter and those ATM windows or certain dates right. So we were pretty judicious in the first quarter.

I would think about the balance of what we need just spread through the remaining quarters.

Of the year, we've got three more quarters to go and plenty of time to get done what we need to get done.

Okay, Great Thats helpful. Thats, all I had thanks.

Brendan.

As a reminder that is star then one if you'd like to ask a question.

Your next question comes from Andrew Weisel with Scotia Bank.

Hey, good morning, everyone.

Morning, Andrew.

First question just to clarify did you say in the prepared remarks that you're adapting your capital plans in response to supply chain constraints I see the Capex bar.

<unk> is unchanged. So can you just elaborate about what type of spending might be shifted around if I heard you right. Good question and thank you for that yes, what we've been doing so far is we've had two slightly deferred some projects we plan to stay within that cap.

Our capital forecast, we've given you for this year and next year for multiple reasons, one of which is to ensure that we maintain a strong balance sheet. So we intend to spend capital up to the numbers. We have we have published and as we see higher prices and as we see inflation, we see it primarily at least thus far in our capital areas, we buy equipment and things of that.

Sure.

So as we see those prices come in we're constantly evaluating each project we have them prioritize we have been ranked we know what our risks are associated with those and the opportunities and then we are deferring some projects.

To date we.

We will see how the rest of the year goes, but so far has been relatively minimal.

There are projects that certainly we would like to do and intend to do but we would be deferring those into other years does that makes sense to you Andrew.

It does yeah. Thank you for explaining that.

Overall.

And then just one other thing to add to that is that we do have the majority the vast majority of this years.

Capital contracted and locked in so.

That's helpful as well.

One other.

The thing I would add to that as well as.

If you think about capital beyond 'twenty three.

The inflationary situation is likely to help us or make us increase our capex forecast in those years.

More detail on that to come later this year, we usually update our capital numbers with our third quarter release.

Early November .

Great. Thank you next question on overall demand I see that electric and gas volumes are up quite a bit year over year, you mentioned the population in migration as well as some new winter peak loads are you able to talk about how the domain compares to pre pandemic levels ideally adjusted for weather.

Customer class.

Yeah, we're looking at each other we'll certainly be data at our Q that we'll file that.

No.

Think that.

Certainly on the residential it remains strong as you know during the pandemic residential load was up we're still seeing that.

And now we're seeing the C&I load and I think the C&I load, yes, it's probably at least back to the pre pandemic levels and I think it's actually exceeded if my memory is correctly the numbers that have been looking at that.

Yes.

Great to hear and one last one if I may I could be wrong, but I believe these voluntary RMG programs would be new for you is that right can you just talk a little bit about the interest conversations you might be having with regulators or customers how big the programs could be just a little more detail on that please.

Yes.

There are new for US Andrew as you said, so yes there'll be new.

And there is some good demand for them, we serve primarily or a lot of agrarian communities. We serve a lot of rural communities within our territory. Many of them are very agrarian oriented and they understand the need for sustainability within their own communities in their own businesses. If you will so we're pretty excited about it.

Think of it as a nice little element to our portfolio.

<unk>.

Yeah.

Produces and blizzards that launching pad for future <unk> opportunities.

Through our Midwest territory.

Very good thank you so much.

Thank you Andrew.

With no further questions I will return the call back to Linn Evans for closing remarks.

Well. Thank you very much for your interest in Black Hills, and I can assure you we're already at work towards continued success in the second quarter.

I look forward to seeing many of you in a few weeks at the American Gas Association Financial Conference.

You list for your help this morning, Thank you everyone.

Thank you for your participation in today's conference. This concludes the program you may now disconnect.

Okay.

Okay.

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Sure.

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Okay.

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For the year.

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