Black Hills Corporation Q1 2023 Earnings Call
Good day and thank you for standing by welcome to the first quarter 2023, Black Hills Corporation earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one.
One on your telephone you will there.
When you're an automated message advising your hand is raised.
Withdraw your question. Please press star one again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Dave Soderquist manager of Investor Relations.
Thank you and good morning, everyone welcome to Black Hills Corporation's first quarter 2023 earnings Conference call you can find our earnings release and materials for this call on our web site at Www Black Hills Corp, Dot com under the Investor Relations heading.
Leading our accordingly earnings discussion today are Linn Evans, President and Chief Executive Officer.
And Kimberly Nooney Senior Vice President Chief Financial Officer and Treasurer.
Also in attendance today are Marty Jones, Vice President of electric utilities, and Todd Jacobs, Vice president of growth and strategy.
Before we begin today, we would like to note that Black Hills will be attending the American Gas Association financial Forum the week of May 21.
Our leadership team will be meeting with investors at the conference in the Investor presentation will be posted on our website prior to the conference.
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 are based on reasonable assumptions actual results may differ materially.
We direct you to our earnings release slide two of the Investor presentation on our website.
And our most recent Form 10-K and Form 10-Q filed with the SEC 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 Dave Good morning, everyone and thank you for joining us.
Before I begin my comments I also want to welcome Marni and Todd. This morning going forward they will be participating in our earnings calls and will help respond to your questions. They are great leaders and I am confident you will appreciate their perspectives I'm.
I'm starting on slide four.
Our team delivered a solid quarter, we're reaffirming our guidance and we have four key takeaways for you today, we're managing O&M to achieve our guidance range. Our operational performance continues to be excellent we're strengthening our balance sheet and we're advancing our growth initiatives.
As also indicated on this slide our triple our theme for this year is resilient.
Liable and ready with each being emblematic of Black Hills and our team.
First I'm, especially proud of our team's operational performance for safety and reliability, our team and systems continue to perform outstandingly reliably serving customers during record cold temperatures and through continued customer growth, while supporting our ability to deliver solid financial results our.
Our generation availability and reliability enabled strong wholesale energy sales that benefited customers and shareholders.
Second we made excellent progress strengthening our balance sheet and enhancing our liquidity with.
With strong cash flows and our financing activities, we fully repaid our commercial paper borrowings Kimberly will cover our financial progress in her update so I won't steal all of her Thunder.
And third we successfully advanced our growth initiatives. Those initiatives included success on our 2023 capital program and we started providing energy to the largest blockchain customer and the state of Wyoming, while advancing our transmission project ready Wyoming.
We also achieved key milestones as we advanced our electric resource plan in Colorado, and South Dakota.
Our financial outlook on slide five is consistent with our fourth quarter disclosures.
We reaffirmed 2023 earnings guidance in the range of $3 65 to $3 85 per share.
And we remain confident in our long term EPS growth rate of 4% to 6% and our target dividend payout ratio of 55% to 65%.
Slide six provides a regulatory update.
We have one active rate review for our Rocky Mountain natural gas pipeline in Colorado, We filed a settlement agreement for an annual revenue increase of $8 2 million.
With an ROE range of $9 5 million to nine 7% and a capital structure of 50% to 52% equity.
Waiting for the administrative law judge's decision on the settlement and we anticipate new rates will be in place during the third quarter.
We're currently preparing rate reviews for Colorado gas in Wyoming gas filed during the second quarter and we expect to file an additional natural gas rate review later this year for a jurisdiction that will announce following our discussions with regulators.
At Wyoming Electric we also put new rates in place along with a new transmission investment and expense rider. This new rider will be beneficial as we start the construction of our 260 mile ready Wyoming transmission line later this year.
Slide seven describes our electric resource plans for Colorado, and our plans for our jointly dispatch South Dakota, and Wyoming system in total approximately 500 megawatts of new renewables and battery storage resources are planned.
These additions will support our goals to reduce electric utility missions, 40% by 2030, and 70% by 2040 off a 2005 base.
We achieved key milestones for both plants during the quarter.
Starting with South Dakota at the end of March we issued a request for proposals for 100 megawatts of renewable generation to be in service by mid 2026 with initial bids due this month.
The RFP is structured as a build transfer providing for utility ownership this'll.
This aligns with our informed view that customers are better served over the long term when the utility owned generation assets, providing customers with the benefit of depreciation and keeping the obligation to serve close to home.
In Colorado, We received commission approval of a unanimous settlement agreement for our clean energy plan.
We will begin the RFP process by mid year for 400 megawatts of renewable resources to be in service between 2026 and year end 2029.
<unk> approved settlement allows for black hills to own up to 50% of the new resources are 200 megawatts.
By our next earnings call in August we expect our bidding process to be underway in Colorado and two have received initial bids for South Dakota. This should give us a realistic idea of the capital investment that will be additive to our base capital plan.
Slide eight illustrates our base capital forecast and summarizes our long term growth plans.
We're investing in the core needs of our customers enhancing our infrastructure with incremental projects and pursuing other profitable growth opportunities.
Our base capital forecast remains consistent at $3 $5 billion through 2027, or an average of $700 million per year.
In 2023, we're managing capex to approximately $600 million as.
As we strengthen our balance sheet and make investments to maintain a safe and reliable system.
Our 2024 capital plan is currently about $800 million.
Reflecting ready Wyoming transmission construction and intentional project deferrals.
Note. This base does not include the additional projects from our electric resource plan that I just mentioned.
The capstone to our growth plan is our pursuit of capital light opportunities new margin streams in innovative solutions and efficiencies in how we do business in slide nine lays out those customer focused growth initiatives in five key areas.
Transmission and storage data centers blockchain.
<unk> and our culture of organizational effectiveness and efficiency.
An example of a strategic infrastructure project is already Wyoming transmission expansion of 260 mile project in southeastern Wyoming.
We continue to pursue other incremental transmission opportunities and we're always evaluating other needs such as natural gas pipelines and storage projects.
Data centers and blockchain are capital light projects that provide recurring earnings streams.
We're especially optimistic about long term growth and serving Hyperscale data centers.
Our existing and new potential data center customers have communicated robust energy demand growth plans for operations in the Cheyenne, Wyoming area, and especially attractive data center location.
Also in Cheyenne, our first blockchain customer is in service and continues to ramp up their energy intake for.
We're optimistic that success with this blockchain mining customer will be a scalable model for other prospects going forward.
Renewable natural gas is another sweet spot of growth for us in our agriculture Rich territories, we've already placed six RMG interconnects into service and we're nearing the finish line on three additional interconnects this year.
With an additional interconnect is expected to be online in 2024.
Our team is also actively working with Counterparties on a variety of projects to expand our RMG offerings and business.
And as we continue to integrate more <unk> into our system. This will help our gas utilities achieve our net zero by 2035 target.
We're also fostering ongoing sustainable cost savings through innovation and continuous improvement in how we do business and how we serve our customers through our energy forward initiatives.
Slide 10 illustrates the strong customer and population growth in our service territories versus the overall state population growth in the United States average.
Ongoing population migration into and across our service territories continues to drive organic growth with five 8% growth in customer count since year end 2017.
The strongest regions of growth in our territories include the Colorado front range, the prime growth areas of northwest, Arkansas Rapid city and the surrounding Black Hills region in Cheyenne Wyoming.
Cheyenne also both excellent commercial growth from data center and blockchain activities that are above and beyond what is reflected in these growth rates.
You'll also note that our other states are experiencing similar steady customer growth.
In closing I am pleased with the results of our team's strategic execution, including operational excellence, a stronger balance sheet and progress on our resource plans and growth initiatives. Our financial results have us on track to achieve our 2023 guidance and we're already hard at work towards second quarter progress with that I'll turn the call.
Over to Kimberly for the financial review Kimberly Thank.
Thank you Lynn and good morning, everyone.
I'll begin my comments on slide 12 with earnings per share compared to the same period last year.
We delivered EPS for the first quarter of $1 73, compared to $1 82 last year.
Results were driven by new rates and rider recovery revenue.
<unk> gain on sale of our noncore, Northern Iowa wind power assets customer growth and wholesale energy sales.
These results were tempered by negative mark to market adjustment on our non utility natural gas commodity contracts higher operating costs.
Increased interest expense due to higher interest rates and impact from the issuance of new shares.
Slide 13 highlights the after tax drivers of change in net income year over year for Q1 2023 compared to Q1 2022.
Higher utility margins were driven by 12 cents of EPS from new rates and investment rider.
Five cents of EPS from customer growth and usage and.
<unk> <unk> of EPS from wholesale energy sales, which were reduced by eight cents per share of mark to market losses on non utility commodity contract within our natural gas utilities.
Compared to normal weather provided a three cent EPS benefit in Q1 2023 compared to a <unk> <unk> benefit in the same period last year.
O&M expenses increased three 6% year over year.
Driven by the inflationary impact on labor costs, and benefits higher materials fuel and outside services and planned maintenance for electric generation assets.
These impacts were partially offset by the gain on sale of the northern Iowa wind power assets.
While total debt was consistent with last year interest expense increased due to higher interest rates.
Additional details regarding our financial results are available in our earnings release, and 10-Q released yesterday.
Slide 14 summarizes our progress during the quarter to strengthen our credit metrics and liquidity through strong operating cash flows disciplined capital investment and execution on our financing plan.
Significantly higher first quarter cash flows from operations were driven by recovery of winter storm costs and higher gas cost in late 2022, and new rates and rider recovery revenue.
As Lynn mentioned regarding our capital plan, we continue to manage our capital investment program to approximately $600 million for 2023 to achieve our credit metric targets.
On the financing front, our team executed our strategy to strengthen our balance sheet and enhance our liquidity position.
Assuming $350 million in senior unsecured five year notes, which we used to repay our short term borrowings on our credit facility.
Additionally, consistent with our earnings guidance, we issued $27 million of new shares through our aftermarket equity program in the first quarter.
Slide 15 displays our financial position through the lens of credit quality capital structure and liquidity.
We improved our net debt to total capitalization from 68% at year end.
The 58, 9% by quarter end.
And at the end of April we had $109 million of cash with no short term borrowings on our $750 million revolving credit facility, providing nearly $860 million of available liquidity.
We are very intentional about strengthening our balance sheet and maintaining our credit ratings.
We will continue to execute on our equity issuance strategy and expect to leverage future cash flows to reduce the amount of debt we intend to refinance this fall.
Puts us well on our way to achieving our target credit metrics.
Slide 16 displays our industry, leading dividend increased track record.
<unk> and increasing dividend is a critical component of our strategy for growing long term value for shareholders.
We expect to continue our 52 year track record of dividend increases with the increases in line with our long term EPS growth rate as we target a long term payout ratio of 55% to 65%.
I'll finish my remarks on slide 17.
Recognizing the current macroeconomic environment, we remain confident in our strategy and our long term growth opportunities.
Our first quarter financial results set the stage for a successful 2023 and beyond.
With that we'd be happy to take your questions.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Our first question comes from Andrew Weisel with Scotiabank you May proceed.
Thank you good morning, everyone.
Good morning, Andrew Good morning, Andrew.
Couple of questions for you here. The first one is <unk> to debt I know you were at 12% last year and the target is 14% to 15% can you tell us what the trailing 12 months would look like after <unk>. How soon you expect to get to 14% and what are the biggest drivers will be to get there.
Yeah, absolutely. So we have as you know three agencies within our portfolio Moody's S&P and Fitch.
We've hit.
Our targets for two of the three.
As of the end of March 31, So we are in excellent shape. There. So we're in good standing with Fitch and Moody's we are working towards achieving S&P's.
Targets by the end of this year.
Okay, meaning 14% or higher by the end of 2023.
Yes.
<unk> early late this year early next year getting to the 14% for S&P.
Okay, and the biggest drivers of the improvement there.
Yes.
The cash position that we're in.
Has been a significant benefit to those calculations.
Okay great.
Next one just to clarify something with sandy.
Dakota.
Oh mean IOP to clean energy resources are now showing mid 2026 versus previously 2025, what explains that delay there does that timing of the RFP or supply chain delays or what's going on there.
I don't think Theres any real significant.
Been causing that.
Particular delay that's the timing of when we think we'll have approval of the Rfps and the plan that we will propose to the commission, we anticipate the Colorado PUC, Andrew will make that decision in early 2024.
Late first quarter, maybe even in the early second quarter. So we will be issuing those rfps mid this year, we will get those rfps back and then we start the process of getting the approved plan through with the commission.
Anticipate again that approval will be kind of first quarter 2024, and then we will start construction thereafter.
So there is timing of all that would probably put us right into that early 2026.
Okay very good and then if I could squeeze one last one in here on O&M as you've talked about cost cutting to achieve the guidance range can you give some examples and how much of that would be one time versus recurring in nature.
Will it be a little bit of both Andrew we do have levers that we have pulled in that we are pulling with respect to internal costs external costs were being very cost conscious.
Some of the more lasting elements that will take us into the future or the elements or the spot savings that we're finding efficiencies through our energy forward program. We have a number of things what we call quick wins that we put in place in other words, the low hanging fruit, where we can help ourselves to be more efficient and unlock those inefficiencies and then we have to.
The people, who are unlocking efficiencies that will be more longer term. So we believe we have sufficient levers that we will be within our guidance.
Our team all of our team is focused on making sure that happens.
Okay. Thank you very much for the time.
Thank you and thank you Andrew.
Thank you.
Our next question comes from Brandon Lee with Mizuho you May proceed.
Hey, good morning, Lynn and good morning, Ken Thanks for taking my questions.
Good morning, Good morning, Brian .
Just a quick question on the wind power asset that you sold.
Does that reduce your equity needs for the.
For the year.
Is that what's the goal.
Okay.
Yes, it does not it was.
Roughly an $18 million cash.
Cash impact so pretty immaterial to the overall portfolio, especially when you think about our.
Credit quality and credit metrics.
And can you talk about the process was it an inbound inquiry or where you can kind of shopping that asset around.
It's something that we started a couple of probably more.
More than a year ago, we had it in our guidance for last year that we thought we would actually sell.
<unk>.
Asset we did essentially a reverse RFP, we put it up for sale had a strong interest in it we thought we might close that transaction last year, but due to some closing requirements rights of way things of that nature.
The approvals that we needed that moved into first quarter of this year.
Okay.
Great. That's all I had thanks a lot.
Thank you Brandon.
Thank you and this concludes the Q&A session I would now like to turn the call back over to Linn Evans for any closing remarks.
Well. Thank you very much for joining us. This morning, we appreciate your interest and all.
Organization.
How do we have made great progress in Q1, serving our customers with reliability and safety and thank you to my team for doing that our team, which strengthens our balance sheet and we executed very well on our growth opportunities and we will look forward to seeing several of you if not many of you at the AGM Financial Forum later this month and again. Thank you for your interest in us and have a black Hills energy safety.
Thank you.
Yeah.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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