Q2 2022 Black Hills Corp Earnings Call
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Okay.
Good day, ladies and gentlemen.
Welcome to the Black Hills Corporation second 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.
Following 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 one at any time during the conference.
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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.
Proceed sir.
Okay.
Yeah.
Thank you good morning, everyone welcome to Black Hills Corporation's second quarter 2022 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 <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.
We believe that our expectations and beliefs are based on reasonable assumptions.
<unk> 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 expectation.
<unk>.
I will now turn the call over timber and Abbott.
Thank you Gerald Hello, everyone and thank you for joining us I'll start on slide four of our Investor presentation.
During the second quarter, we delivered solid financial results and advanced our strategic initiatives.
Especially note our progress with our regulatory initiatives and our electric resource planning and we reaffirmed our 2022 earnings guidance yesterday.
Our success starts with our dedicated team and their commitment to serving our customers with excellence.
To express how proud I am of our team for delivering a high level of operational performance that our customers depend upon everyday.
Safety and reliability are critical as we journey through the nation's clean energy transition.
High heat wave recently demonstrated once again, the critical need for reliable and dispatching capacity and the importance of a responsible mix of resources.
Once again for the ninth consecutive summer Ah Wyoming electric system marked a new all time demand peak at our South Dakota Electric system also surpassed its all time peak from last summer, reflecting the ongoing customer growth in our service territories are.
Our industry, leading generation of system availability made it possible for us to keep home safe and keep businesses operating without any restrictions or forced outages our vertically integrated model with nearly 500 megawatts of owned generation.
How's us to serve our customers safely reliably and cost effectively during these volatile energy markets.
We were also successful with another innovative customer solutions during the quarter. Our team completed its first agreement for service under our blockchain tariff in Wyoming with a well established crypto minor that is investing in long term operations and Cheyenne.
We anticipate our customer will begin taking delivery of up to 45 megawatts of energy by year end.
With an option to expand service up to 75 megawatts.
The energy for this customer will be sourced through the energy markets and delivered through a reliable infrastructure, which will benefit our other cheyenne utility customers.
On slides five and six we've outlined our progress with our regulatory initiatives I am pleased that our Arkansas gas rate review continues to advance on schedule with a hearing before the Arkansas Commission later this month.
Our request seeks to implement new rates in the fourth quarter and implement and enhance system safety integrity and reliability rider.
On June one we filed a rate review for Wyoming Electric we're requesting new rates in the first quarter of 2023 to recover the $250 million of investments. We have made in the Cheyenne region. Since our last rate review eight years ago in 2014.
We also made progress with our winter storm Euro cost recovery during the quarter, thus far we recovered more than one quarter of the incremental costs, we incurred to serve customers during storm Yuri.
In June we received final approval for our recovery plan in Arkansas, and we're waiting for a final decision in Wyoming, where we started collecting interim rates last September .
We also filed for approval of our voluntary renewable natural gas and carbon offset programs in Colorado and Kansas.
The proposed tariff will allow business and residential customers to opt into the program.
Looking forward. We're also preparing to file a rate review later this year for Rocky Mountain natural gas, our intrastate natural gas pipeline in Colorado.
The last two items to cover on slide five are related to our long term transmission and electric resource planning for Colorado, South Dakota and Wyoming.
Our theme for 2022 is powering a better future a recognition to the ongoing clean energy transition.
We're optimistic about our generation and transmission opportunities as part of this transition and our plan to expand our energy delivery systems to meet growing customer demand, while maintaining resiliency and reliability and developing a smarter grid.
We've laid out a clear path forward for our infrastructure across our electric utilities in total we plan to add 600 megawatts of renewable resources in battery storage and 260 miles of electric transmission as part of our ready Wyoming initiatives.
Slide seven summarizes our clean energy plan for our electric utility and Colorado. The plan lays out a path to a 90% reduction in greenhouse gas emissions intensity by 2030 from a 2005 baseline.
Our proposed plan will achieve this goal through the addition of approximately 400 megawatts of renewable wind and solar resources and 50 megawatts of battery storage between 2025 and 2030, we already closed our only remaining coal plants in Colorado back in 2015.
And these new clean energy additions would result in almost 80% of our Colorado customers electricity coming from carbon free resources.
Importantly, the reliability of our system is supported by the dispatch will play blow airport generating station.
We expect to initiate the competitive bidding processes by mid 2023 for these new resources in Colorado legislation provides up to 50% utility ownership of these additions.
Slide eight summarizes our resource plan that we filed last year for our jointly operated electric system in South Dakota and Wyoming.
As the slide indicates our proposed plan includes the addition of 100 megawatts of renewable resources and potentially 20 megawatts of battery storage.
We're preparing for the next steps that will likely include a competitive bidding process in which we will participate.
And slide nine summarizes our ready Wyoming transmission project and the benefits we expected to provide for customers for the state of Wyoming and for our shareholders. The project continues to advance through the regulatory process on pace with our expectations.
Moving to slide 10, we are excited about the tangible progress we have already delivered on our emissions reduction goals and other ESG goals to date, we've already reduced our emissions intensity by more than one third since 2005.
I'll also provide key updates for other ESG disclosures, including SaaS B, the Agi <unk> EIA templates and the natural gas sustainability initiatives, notably we will for the first time published TC FD disclosures, we're excited about our progress for both our electric and gas businesses and delivering a cleaner more.
Slide 11 summarizes our long term growth plan, we're focused on growing long term value for our customers and shareholders through our customer focused capital investment program developing incremental capital projects such as those that could result from our electric resource planning and executing on other opportunities to grow our earnings stream.
We continue to deliver progress on this plan during the first half of 2022 and look forward to developing these opportunities for the future.
Thanks, Lynn and good morning, everyone I'll start on slide 13, which shows our second quarter EPS and segment operating income for 2022 compared to 2021.
<unk> was 52 compared to <unk> 40 in Q1, 2021 hand year to date, we've delivered $2 33 compared to $1 93 in the <unk>.
We experienced the typical shoulder period for both our electric and gas businesses with relatively normal weather earnings were primarily driven by new rates and riders and a onetime benefit related to winter storm cost recovery at our gas utilities.
Our operating expenses tempered results.
Slide 14 illustrates the detailed drivers of change in net income year over year for the second quarter. All amounts are after tax in more detail is available in our earnings release distributed yesterday and in our 10-Q to be filed later today.
Margins improved due to new rates at our gas utilities and recovery for rider eligible investments across both our electric and gas utilities.
A significant driver in the second quarter was a onetime 12% EPS benefit for a true up of carrying costs related to winter storm here.
It was comparable to the prior year for both the quarter and the first half of the year for the second quarter in 2021, and 2022 weather provided <unk> per share benefit versus normal.
Year to date through June last year weather benefited earnings by seven <unk> compared to normal versus <unk> of weather benefit in the first half of 2021.
We recognize the negative mark to market adjustment of <unk> <unk> of EPS in Q2, 2022 on energy contracts, which was comparable to the Q2 2021 negative impact of <unk>.
Please see page 31 in the appendix for detail on the quarterly impacts of weather Mark to market adjustments and winter storm here.
For the quarter O&M was higher mainly due to inflationary impacts driven by higher outside services.
Computing costs and vehicle fuel costs.
DD&A increased due to our capital investment program.
<unk> expense for the quarter increased due to higher short term interest rates.
Other income was higher due to reduced expense related to our nonqualified benefit plans driven by stock market performance.
Taxes were favorable due to a onetime benefit from a state rate change.
Higher Ptc's from increased wind production and a current year federal inflation adjustment to the PTC right.
These were partially offset by prior year benefits from TC J, a related bill credits and flow through benefits related to repairs and maintenance.
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 our.
Our debt to total capitalization ratio improved to 67% down from 62% at year end. Thanks to strong cash flows and recovery of storm year costs in the first half of 2022.
We expect to achieve our target capital structure of mid <unk> by late 2023 or early 2024 is our business generates strong cash flows and we recover storm costs repaid debt and execute on our aftermarket equity offering price.
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.
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 listed on Slide 17, which is consistent with our prior disclosures.
We continue to anticipate 2022 earnings in the range of $3 95 to $4 15 per share.
We've been able to largely mitigate the impact of rising interest rates inflation and supply chain constraints on our financial results.
We remain confident in our long term growth plan, while recognizing that these factors pose a challenge for the second half of this year and 2023.
Regarding expectations for our capital plan. We have noted previously that certain investments due mainly to inflation were deferred to maintain our 2022 and 2023 capital investment in the neighborhood of $600 million to enhance our liquidity and balance sheet.
As a reminder, we expect to refresh our five year base capital plan and initiate next year's guidance when we release, our third quarter earnings report in early November .
So between land and Mikes comments I think we've covered the information shown on this slide and with that we will take questions.
As you can likely tailwind around here in different locations today. So please do bear with us as we answered your questions.
Ladies and gentlemen, we are ready to open the line for your questions.
If you wish to ask a question. Please press star followed by one one on your Touchtone telephone.
Again press Star one one to ask a question.
Please standby for your first question.
Our first question comes from Paul Zimbardo with Bank of America. Your line is now open.
Hi, Thank you good morning.
Good morning, Paul.
I just wanted to kick it off with kind of a clean up how should we think about that and you call. It a onetime winter storm or a carrying cost true up.
That contemplated in the original 2022 guidance and if not are there other kind of offsets we should be thinking about.
That was not contemplated in our initial guidance Paul.
We did contemplate some carrying costs, but this was a true up based on.
Some outcomes in the different states during the second quarter.
Okay are there other kind of unrelated offsets in the year should we just think about it as tracking well in the year.
Hi.
I think you're pointing toward.
Our full guidance for the year I take it right.
And I would just suggest we've got six months left to go.
We're managing through the inflation and the things that are coming at us from a headwind perspective, we certainly feel very comfortable with our guidance range and are sticking with it.
Okay Crystal clear.
And then changing topics a little bit briefly just how to think about the balance sheet as it relates to cash taxes, and a minimum taxes super topical, but I don't think you would trigger the provisions given your pre tax income, but just kind of holistically thinking about like the cash tax rate and what you expect going forward.
Yes.
Yes.
This quarter had well.
Our cash tax rate is going to run in that 10% to 12%. If you are asking for post 2020.
Two.
Is that where youre going.
Correct, yes, okay, because I think it's been a little bit lower capacity of the years.
Yes, and as our pre tax income continues to increase the PTC unless we add some more renewable projects or some other things.
The effective tax rate should increase a bit as we move forward.
Okay that makes sense. Thank you all.
Thanks, Paul.
Yeah. Thanks, Paul This is Lynn I'll, just add real briefly just real proud how proud we are of the team and the regulatory team and how well they've done with the storm Yuri recoveries just outstanding success there.
Really demonstrating our relationships with our commission so.
The team acknowledged them. So thanks for your questions Paul.
Our next question comes from Andrew Weisel with Scotiabank. Your line is now open.
Hi, good morning, guys.
If I can take one more shot at that guidance question are you, suggesting that youre pointing toward the high end. Thanks to the gain the low end because of those warnings or somewhere in between or is it simply no comments.
Landfill free to comment on top of me, but what I would say is we're not guiding towards.
Either end of the range, we're sticking with the range, we've got six months to go in.
Sure.
Weather various other things can impact this Andrew so we're sticking with our range.
Yes, I think rich nailed it we're sticking with our range.
Lots of opportunities through the year, both pro and Con, we'll see how the weather impacts us.
But we're confident in the guidance range, we put out and are very pleased with our team has responded to it.
<unk> pressures and continued to perform from an operations perspective, and we're very proud of that so we're going to stick with our guidance for the remainder of this year.
Okay. Thanks for clarifying I just wasn't sure. If you were trying to suggest one way or the audit with the messaging.
My next question is about new renewables and storage.
What's your latest expectation about how much of that you'll be able to own and rate base versus buying.
Buying the output under PPA I know that in Colorado at least 50% as the ceiling, but how are you thinking about your competitive position.
But we're always seeking to all and we think Thats whats best for the customer rate based assets, where they get the advantage of the depreciation Andrew in my 20 plus years within this business and with this company I've seen very few ppas. It really worked out well for the customer and the long term. So we believe taking the customer's perspective ownership is the best thing.
Now of course, we will see how that works through the regulatory environment to the regulatory process.
Excuse me, please for Wyoming, and South Dakota are very likely to put out rfps and we will bid into those as aggressively as we can and as you just mentioned Andrew in your question in Colorado, the legislation and the case, we can have up to 50% of our own up to 50% of that Jed.
A generation on behalf of our customers, which we think is very positive.
If we look at the inflation reduction Act.
We've had a few days of that now in terms of our review so we're still learning that leaning on our trade associations and our own team to review that but that tax credit transferability strikes us as being something that could be if the bill passes quite positive allow us to have a much more competitive position.
We bid into those rfps going forward. So we're watching that closely and I will see if that gets passed of the Lee we're always looking at lots of different opportunities, whether they'd be billed transfers tax equity partnerships those kinds of things. So we're always being creative in how we look at them and we have a team that's very focused on that owning as much as we think.
We can't again.
Primarily because we think thats the right thing to do for customers in the long term.
Thank you one last follow up if I can on block chain and I know that the tariffs are interruptible can you kind of explain the strategy behind that is the hope that cryptocurrency mining might become enough of a source of demand over time that they could be something of a lever to pull for reliability. For example on peak demand days are extreme.
Weather events.
Well they are interruptible customers for a couple of different reasons, one we want to make sure that our current customers are protected in terms of those peak days et cetera. The arrangements that we have entered into with the blockchain minor as we go out to the market obtain that energy for them and then they pay us a fee if you will.
And we have the opportunity on an hour by hour day by day basis to determine whether they want to take the energy or not so it really provides us a great opportunity to add income to the organization without capital expense.
These these entities that we are.
Contracted with they put the capital upfront build the necessary infrastructure for us to serve them. They're there they are.
Our credit worthy customers and we're excited to serve them and provides us great upside for the organization.
Through the arrangements that we put in place with them.
Rich may have something to add to that.
The one other thing maybe to add to that is it also benefits our customers in Wyoming.
Very good win win for all the details of our holders.
Okay.
Youre welcome Andrew Thank you for your question.
Our next question comes from Brian Russo with Sidoti. Your line is now open.
Good morning, Brian Yeah, Hi, Hi, good morning, Hey, just to clarify.
Colorado legislation that allows the utility to own up to 50%.
Are you still.
Subject to the competitive RFP, meaning.
Whatever the Youtube, where the utilities have to bid in generation, that's deemed lease costs lease risk or could that be bypassed.
With maybe some with this legislation.
Good question, Brian I think we're still learning what would happen there we'll watch what the commission the <unk>.
<unk> that we should do we're about six to nine months behind itself, we're watching their doctors their docket quite closely as they go through their plan.
We believe likely yes, we'll probably have to put some kind of bid forward with the understanding that the legislation indicates that the price needs to be comparable to the bids that we will receive so more to come with respect to that we are anticipating that we will own up to 50% of the approved generation for <unk>.
Cited to be able to have that opportunity, but we'll see how the regulatory environment and the construct evolves over time.
Okay got it and then can you just remind us how much equity do you.
Plan on issuing under the ATM in 'twenty, two and 2023 and does the cash collections from winter storm in Europe .
<unk> outlined.
I believe on page six combined with some it looks like non project related earnings drivers that could help further support cash flow.
Would that lessen your equity needs.
Going forward all else equal.
Yes.
Our guidance indicates a $100 million to $120 million. This year. So we've got 80 to 100 to go we think we can comfortably do that in the second half of the year.
We haven't put specific numbers out for next year, but you probably should think about the same zip code.
And then.
As to your comment yes.
That's going along very well collections are coming along.
We're right on track with what we thought we would and that's certainly helping our metrics as well and then you mentioned additional drivers that are helpful. So that'll help us shape, what our formal 2023 needs Ireland would come out with.
<unk> third quarter earnings and give our guidance for next year.
Okay got it thank you.
Thank you Brian .
As a reminder, if you'd like to ask a question at this time that is star one one.
Our next question comes from Brandon Lee with Mizuho. Your line is now open.
Morning, Brandon.
Are you seeing any slowdown in customer growth and some of the service territories that really benefited from a population migration during the pandemic, maybe Doug rapid city area or even in the Arkansas area, just given high home price appreciation in those areas have you seen any sort of slowdowns.
Great question, Brandon Thanks for raising that the answer to that is no. We have not seen any slowdowns. In fact, we're continuing to experience strong in migration. Both in all three that you mentioned in northwest, Arkansas front range of Colorado, and then now the Black Hills has been added to that list over the last couple of years. So our customer migration is very.
Ron.
Seeing really strong recovery in our commercial and industrial loans back to more than pre pandemic levels.
Residential youll see in our 10-Q has dropped up just a little bit, but I think that's because people are going back to work.
Which is good for our local economies. So the answer to your question is very strong growth continuing in our in our regions and again youll see that in our 10-Q that we put out today.
Perfect. Thanks for the time.
Youre welcome. Thank you for the question.
With no further questions I will return the call back to Linn Evans for closing remarks.
Well. Thank you very much for joining us today, we greatly appreciate your attention and interest in Black Hills Corporation I once again I'll. Thank our team for the great quarter and we're hard at work in this quarter to deliver results on behalf of your shareholders and deliver great service to our customers. So thank you for joining us.
Thank you for your participation in today's conference. This concludes the presentation you may now disconnect good day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.