Q2 2024 Black Hills Corp Earnings Call

Good day and thank you for standing by. Welcome to the Q2 2024 Black Hills Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session.

Operator: earnings conference call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. I would now like to hand the conference over to your speaker today, Jerome Nichols, Director of Investor Relations.

To ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. I would now like to hand the conference over to your speaker today, Jerome Nichols, Director of Investor Relations.

Jerome Nichols: Thank you. Good morning, and welcome to Black Hills Corporation's second quarter 2024 earnings conference call. You can find our earnings release and materials for our call this morning on our website at www.blackhillscorp.com under the investor relations heading. Leading our quarterly earnings discussion today are Linden Evans, President and Chief Executive Officer; Kimberly Nooney, Senior Vice President and Chief Financial Officer, and Marne Jones, Senior Vice President, Utilities.

Jerome Nichols: Thank you. Good morning and welcome to Black Hills Corporation's second quarter 2024 Earnings Conference Call.

Speaker Change: You can find our earnings release and materials for our call this morning on our website at www.blackhillscorp.com under the Investor Relations heading.

Speaker Change: Leading our quarterly earnings discussion today are Linden Evans, President and Chief Executive Officer, Kimberly Nooney, Senior Vice President and Chief Financial Officer, and Marne Jones, Senior Vice President, Utilities.

Jerome Nichols: During our earnings discussion today, 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 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 Linden Evans.

Speaker Change: During our earnings discussion today, comments we make may contain forward-looking statements, as defined by the Securities and Exchange Commission.

Speaker Change: 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.

Speaker Change: We direct you to our earnings release, slide 2 of the investor presentation on our website.

Speaker Change: 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.

Linden Evans: Thank you, Jerome. Good morning, and thank you all for joining us today. Before we share our comments about our quarter, on behalf of the Black Hills team, I would like to thank Jerome for his 20 years of service to our company, for the last 13 years as our Director of Investor Relations. Many of you know Jerome well, and I ask that you join us in wishing him all the best as he enjoys his well-deserved retirement. And as we say thank you to Jerome, we're pleased to welcome Sal Diaz to our team as our new Director of Investor Relations. Congratulations, Jerome.

Speaker Change: I will now turn the call over to Linden Evans.

Linden Evans: Thank you, Jerome. Good morning and thank you all for joining us today.

Linden Evans: Before we share our comments about our quarter, on behalf of the Black Hills team, I would like to thank Jerome for his 20 years of service to our company, for the last 13 years as our Director of Investor Relations.

Speaker Change: Many of you know Jerome well, and I ask that you join us in wishing him all the best as he enjoys his well-deserved retirement. And as we say thank you to Jerome, we're pleased to welcome Sal Diaz to our team as our new Director of Investor Relations.

Linden Evans: And Sal, welcome to the call. I'll begin my comments with a brief overview of the quarter. Kimberly will provide our financial update, and Marne will provide more detail on our team's operational performance and our strategic progress. Turning to slide three, we continue to execute our customer-focused strategy during the second quarter. Once again, I'm pleased to share that our team delivered excellent service to our customers, continued to execute on our financial targets, and advanced our regulatory and growth initiatives.

Speaker Change: Congratulations, Jerome. And Sal, welcome to the team.

Speaker Change: I'll begin my comments with a brief overview of the quarter, Kimberly will provide our financial update, and Marne will provide more detail on our team's operational performance and our strategic progress.

Speaker Change: Turning to slide three.

Speaker Change: We continue to execute our customer-focused strategy during the second quarter.

Speaker Change: Once again, I'm pleased to share that our team delivered excellent service to our customers, continued to execute on our financial targets, and advanced our regulatory and growth initiatives.

Linden Evans: I'm very proud of our team as we continue to dependably serve our customers, living out our ready-to-serve commitment. Our thoughts are certainly with our customers who have faced severe storms and flooding in recent months across several of our communities. Marnie and I witnessed firsthand the impact on neighborhoods and businesses, and we appreciate the admirable response and service of our team, who quickly responded to the needs of our customers and are supporting the restoration efforts in our impacted communities.

Speaker Change: I'm very proud of our team as we continue to dependably serve our customers living out our Ready to Serve commitment.

Speaker Change: Our thoughts are certainly with our customers who faced severe storms and flooding in recent months across several of our communities.

Marne Jones: Marne and I witnessed firsthand the impact on neighborhoods and businesses.

Marne Jones: and we appreciate the admirable response and service of our team who quickly responded to the needs of our customers and are supporting the restoration efforts in our impacted communities.

Linden Evans: As we continue to support those impacted, I'd like to say a huge thank you to our colleagues listening in today across our service territory for exemplifying our values and our mission of improving life with energy. Well done.

Speaker Change: As we continue to support those impacted, I'd like to say a huge thank you to our colleagues listening in today across our service territory for exemplifying our values and our mission of improving life with energy. Well done.

Linden Evans: Our ongoing capital investment plan is critical to the commitments we've made to serve our customers and communities safely, reliably, and cost-effectively, and we remain on track with our $800 million capital plan for 2024. This includes our Ready Wyoming Electric Transmission Project, which strategically interconnects our Wyoming and South Dakota transmission systems, enhancing the resiliency and capacity of our regional energy infrastructure. Notably, this will benefit our customers with cost stability and expanded energy market access.

Speaker Change: Our ongoing capital investment plan is critical to the commitments we've made to serve our customers and communities safely, reliably, and cost-effectively. And we remain on track with our $800 million capital plan for 2024.

Speaker Change: This includes our Ready Wyoming Electric Transmission Project, which strategically interconnects our Wyoming and South Dakota transmission systems, enhancing the resiliency and capacity of our regional energy infrastructure.

Speaker Change: Notably, this will benefit our customers with cost stability and expanded energy market access.

Linden Evans: We also continue to make progress in our regulatory plan for the year, with three active rate reviews moving along as expected. Looking forward, we expect a normal cadence of approximately three to four rate reviews per year to seek recovery of our investments and reduce lag.

Speaker Change: We also continue to make progress in our regulatory plan for the year with three active rate reviews moving along as expected. Looking forward, we expect a normal cadence of approximately three to four rate reviews per year to seek recovery of our investments and reduce lag.

Linden Evans: We're diligently executing our financial plan as we continue to improve our credit quality and advance our growth initiative. To meet the growing energy needs of our customers and communities, we are in the final stages of delivering on our long-term electric resource plans for Colorado Electric and South Dakota Electric. In Colorado, we're seeking approval of selected bids for 400 megawatts of new renewable resources, including 250 megawatts that would be utility-owned. And in South Dakota, we're planning to add 100 megawatts of cost-effective utility-owned resources by 2026.

Marne Jones: We're diligently executing our financial plan as we continue to improve our credit quality and advance our growth initiatives.

Marne Jones: To meet the growing energy needs of our customers and communities, we are in the final stages for delivering on our long-term electric resource plans for Colorado Electric and South Dakota Electric.

Linden Evans: We remain confident in our financial outlook listed on slide four, which is consistent with the first quarter. Based on solid year-to-date results, including new margins and our team's continued disciplined expense management, we're on track to deliver on our earnings guidance range of $3.80 to $4 per share. Our strong growth opportunities and continued execution of our initiatives gives us confidence in achieving our long-term EPS growth target of 4 to 6 percent. Slide five provides a summary of our hyperscale data center and blockchain growth opportunities.

Marne Jones: Slide 5 provides a summary of our hyperscale data center and blockchain growth opportunities.

Linden Evans: We recently announced our plan to power META's first data center in Cheyenne, Wyoming. I am proud of our track record of reliability and innovative energy solutions, which helped drive META's decision to build their $800 million, 715,000 square foot AI data center within our Cheyenne community. We're excited to support their new project, which will benefit all our Wyoming customers with greater infrastructure investment, our communities with new jobs and tax revenues, and our shareholders through our innovative energy procurement model.

Marne Jones: We're excited to support their new project, which will benefit all our Wyoming customers with greater infrastructure investment, our communities with new jobs and tax revenues, and our shareholders through our innovative energy procurement model.

Linden Evans: We expect to begin serving MEDA's initial demand in 2026. Earlier this year, we said that we anticipate future earnings from this type of customer will exceed 10% of total EPS by the end of our five-year plan through 2028. This new data center is included in that expectation. I'll also note that Wyoming's tax policies provide a favorable environment for data center and blockchain growth within the state. Moving to slide 6, we remain confident in our long-term growth trajectory, supported by our base capital investment plan, ongoing organic growth, including data centers, and other incremental investments.

Speaker Change: This new data center is included in that expectation.

Linden Evans: Over our five-year plan period, we expect to invest an average of more than $800 million per year. Our $1.3 billion in capital investment in 2026 includes the majority of generation investments resulting from our electric resource plans, which Marnie will cover in her business update. In 2027 and 2028, we anticipate incremental opportunities to be added to our plan as we gain more clarity around timing and costs, as indicated by the green arrows above the chart.

Speaker Change: Over our five-year plan period, we expect to invest an average of more than $800 million per year. Our $1.3 billion in capital investment in 2026 includes the majority of generation investments resulting from our electric resource plans, which Marnie will cover in her business update.

Marnie: In 2027 and 2028, we anticipate incremental opportunities to be added to our plan as we gain more clarity around timing and costs, as indicated by the green arrows above the chart.

Linden Evans: And before I turn the call over to Kimberly, I'd like to remind you that we recently published our new 2023 Corporate Sustainability Report, highlighting our progress on our environmental, social, and governance goals. We remain on track to cost-effectively achieve our emissions reduction goal. With that, I'll turn it over to Kimberly for our financial update. Kimberly?

Kimberly Nooney: Thank you, Linn, and good morning, everyone. We delivered a solid second quarter. We remain focused on our objective to carefully manage our expenses and improve credit quality, and we achieved those goals for the first half of the year. Slide nine shows second quarter EPS drivers compared to the same period last year. We reported $0.33 per share compared to $0.35 per share in Q2 2023. Quarterly earnings were primarily driven by new margins and expense management by our team, which largely offset the impacts of weather and a prior year income tax benefit.

Marnie: Slide 9 shows second quarter EPS drivers compared to the same period last year.

Kimberly Nooney: We realized $0.13 of higher margins from new rates in rider recovery, including data center margins, and $0.03 of customer growth and use. These positive results were partially offset by impacts to revenue due to unplanned generation outages. Through continued cost management, we delivered lower O&M of $0.04 per share compared to Q2 2023, primarily due to lower labor costs. We continue to experience the impacts of inflation within our business, including additional expenses associated with increasing insurance premiums.

Kimberly Nooney: Given these factors, coupled with the mild weather we experienced during the first half of the year, we will continue to manage our O&M to an increase of approximately 3.5% for the full year to achieve our 2024 financial target. As a reminder, our earnings guidance assumes normal weather. For the quarter, compared to normal, weather negatively impacted EPS by $0.07 per share; compared to Q2 2023, weather negatively impacted earnings by four cents per share. Income taxes increased due to a $0.12 prior year benefit resulting from a reduction in Nebraska's state income tax rate.

Marnie: Given these factors, coupled with the mild weather we experienced during the first half of the year, we will continue to manage our O&M to an increase of approximately 3.5% for the full year to achieve our 2024 financial targets.

Speaker Change: Income taxes increased due to a $0.12 prior year benefit resulting from a reduction in Nebraska's state income tax rate.

Kimberly Nooney: Slide 10 displays the earnings drivers through the first half of 2024. We are on track to achieve our 2024 financial targets despite unfavorable weather of $0.14 per share compared to 2023. Year-to-date, earnings per share increased 6% year-over-year as new margins and expense management more than offset the impact of weather, financing, depreciation, and prior year one-time benefits. Further details on year-over-year changes in operating income can be found in our earnings release and 10-Q to be filed with the SEC later today.

Speaker Change: We are on track to achieve our 2024 financial targets despite unfavorable weather of $0.14 per share compared to 2023.

Kimberly Nooney: Moving to slide 11, which depicts our solid financial position through the lens of credit quality, capital structure, and liquidity. We continue to reduce our debt-to-total capitalization ratio and improve other key credit metrics in our commitment to maintain BBB-plus credit quality. We issued $42 million of new shares under our ATM during the quarter for a total of $74 million through the first half of the year. As previously disclosed, we are expecting $170 million to $190 million in equity issuances for the year.

Marnie: Moving to slide 11, which depicts our solid financial position through the lens of credit quality, capital structure, and liquidity.

Speaker Change: We continue to reduce our debt to total capitalization ratio and improve other key credit metrics and our commitment to maintain triple B plus credit quality.

Speaker Change: We issued $42 million of new shares under our ATM during the quarter for a total of $74 million through the first half of the year.

Kimberly Nooney: Our liquidity remains strong at quarter end with full availability under our $750 million revolving credit facility and $625 million in cash following the issuance of $450 million of notes in May. We will repay our $600 million notes maturing later this month.

Speaker Change: Our liquidity remains strong at quarter end, with full availability under our $750 million revolving credit facility and $625 million in cash following the issuance of $450 million of notes in May.

Speaker Change: We will repay our $600 million notes maturing later this month.

Speaker Change: Our next step maturity occurs in 2026 and we are evaluating timing and options for refinancing that maturity.

Speaker Change: Slide 12 illustrates our industry-leading dividend track record of 54 consecutive years.

Speaker Change: A dependable and increasing dividend is an important component of our strategy for delivering long-term value for our shareholders.

Linden Evans: Thank you, Kimberly. We had another strong quarter serving our 1.3 million families and businesses across our footprint. Slide 15 provides an update on our enhanced disclosures and engagement on wildfire management and risk mitigation, a key safety and reliability priority of ours for more than a decade. The 260-mile line is being constructed in segments and remains on target to be in service by the year 2025, with our first segment expected to be in service later this year. When complete, REDI Wyoming will provide additional capacity, expanded access to energy markets and renewable energy, and is expected to stabilize long-term costs for customers.

Speaker Change: I'll now turn the call over to Marnie for a business update.

Marnie: Through windstorms, tornadoes, and flooding, our team of operational experts proactively managed our systems to keep our customers safe, with system reliability and resiliency top of mind.

Marnie: I'll start my comments on slide 14 with a regulatory update.

Marnie: We have demonstrated our ability to reach constructive results with three or more rate reviews annually in recent years. We are in the final stages for our Arkansas gas rate review and continue to anticipate new rates in the fourth quarter.

Marnie: Our Iowa Gas Rate Review continues as planned with interim rates in place since May 11th and final rates expected in early 2025.

Marnie: In June, we filed a rate review for Colorado Electric, our first since 2016.

Marnie: Over the past eight years, we have kept base rates unchanged while incurring increased costs and necessary system investments of approximately $470 million, which support a safe, reliable, resilient, and clean energy system.

Speaker Change: Nearly one-third of that capital is currently recovered through our transmission rider.

Speaker Change: Slide 15 provides an update on our enhanced disclosures and engagement on wildfire management and risk mitigation, a key safety and reliability priority of ours for more than a decade.

Speaker Change: Operationally, we use a layered approach to wildfire mitigation, which can be summarized into three broad categories, asset programs, integrity programs, and operational response.

Speaker Change: In June, we disclosed our Comprehensive Wildfire Mitigation Plan, which provides deeper insight into the practices, policies, and procedures we carry out every day.

Speaker Change: We continue to engage broad stakeholder groups, including community and local agencies, regulators, legislative bodies, and our industry peers to review and advance our wildfire management and mitigation plans.

Speaker Change: In that spirit, we are working with these stakeholders to formalize our Public Safety Power Shutoff Program, or PSPS, and expect to implement it in the first half of next year.

Speaker Change: Moving on to slide 16, I would like to share our progress on our ongoing strategic initiative.

Speaker Change: Our largest active capital project is our Ready Wyoming Transmission Project.

Speaker Change: The 260-mile line is being constructed in segments and remains on target to be in service by year-end 2025, with our first segment expected to be in service later this year.

Speaker Change: When complete, REDI Wyoming will provide additional capacity, expanded access to energy markets and renewable energy, and is expected to stabilize long-term costs for customers.

Speaker Change: The investment for this project will be recovered through our Wyoming Transmission Rider as segments are placed in service.

Speaker Change: Slide 17 provides an update on our clean energy plan in Colorado. In July, the Colorado Public Utilities Commission reviewed our preferred portfolio, which includes a 200-megawatt billed transfer solar project, a 50-megawatt billed transfer battery project, and 150 megawatts of wind energy through a power purchase agreement.

Speaker Change: In their decision, they asked us to submit additional details on generation and transmission costs.

Speaker Change: In response, earlier this week, we provided the additional information and proposed a 100 MW solar PPA to replace the 150 MW wind PPA, with the remaining portfolio unchanged.

Speaker Change: We are awaiting a final decision by the Commission, which we expect later this year.

Speaker Change: Slide 18 outlines our South Dakota electric resource plan.

Speaker Change: we continue to pursue 100 megawatts of utility-owned generation that will cost-effectively and reliably serve our customers.

Speaker Change: We are targeting an in-service date of mid-2026 for 100 megawatts of natural gas fire generation.

Speaker Change: We plan to file a pre-application notice with the South Dakota Public Utilities Commission and request a Certificate of Public Convenience and Necessity from the Wyoming Public Service Commission in the second half of 2024.

Speaker Change: With that, I will now turn the call back to Lynn.

Lynn: Thank you, Marnie. I'll summarize our quarter by expressing my thanks to our team for how they continue strong progress on our strategic initiatives as we invest in and maintain our systems for our customers.

Speaker Change: successfully execute our regulatory plan, tirelessly develop and execute our strategic growth opportunities, and creatively serve our expanding data center and blockchain load growth.

Speaker Change: And with that, we'll take your questions.

Speaker Change: Thank you. As a reminder to ask a question please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question please press star 1 1 again. One moment for questions.

Speaker Change: Our first question comes from Julian DeMoulin-Smith with Jeffries. You may proceed.

Speaker Change: Julian, your line is now open. If you're on mute, please unmute.

Julian DeMoulin-Smith: Alright, I'm picking up the handset here. Let's make sure it works. Hey, good morning team. How you guys doing?

Speaker Change: Good, Julian. Welcome back to the game.

Julian DeMoulin-Smith: Thank you so much. Congrats, Jerome, on your retirement. It's been a great line. It's been a real pleasure.

Jerome Nichols: Thank you very much. I appreciate that.

Speaker Change: Absolutely. Look guys, nice updates and continued success here and I give you guys kudos for being early and adapting to data centers in this conversation early on with these novel tariffs.

Speaker Change: To that end, this 10% number by the end of the five-year plan

Speaker Change: Can you talk a little bit about the parameters that are reflected versus perhaps maybe not necessarily reflected in the capital budget here? I mean, I know this is a fluid conversation.

Speaker Change: but what's in, what's not in, in terms of how you get there. And then also related to that, focusing on a tariff conversation, how do you think about the rate case cadence and how that gets reflected in earnings vis-a-vis some of the novel tariffs that you guys have had in place?

Speaker Change: Thank you for that question, Julian, and we appreciate being able to focus on our data center successes.

Speaker Change: As you know, we've had this LPCS, a large power contract service tariff in place since about 2016, so it's been an important part of our growth model and our strategy for the last several years.

Speaker Change: especially as we had the good fortune of serving Microsoft and some other blockchain customers.

Speaker Change: We're very excited to have announced META here very recently in June, and that's a project we had been working on for some time with them. And so the META and the Microsoft loads and other loads that we anticipate are reflected in that 10% or perhaps greater 10% of our EPS towards the outer part of the plan.

Speaker Change: in around 2028.

Speaker Change: We're very fortunate to serve a great service territory for data centers, starting with the weather that we have there, the elevation, the fiber, there's lots of things that attract.

Speaker Change: so that we understand what's happening within our service territory beyond the data centers. So, we look at our normal customers, if you will, our residential, our commercial, and our industrial customers, and then we also look at these data centers, you know, independently, if you will, and how we manage that system cohesively for all interested parties.

Speaker Change: Got it. Excellent. Thank you guys very much. Appreciate it. And actually, just to elaborate on what you just said a second ago, when you were talking about other opportunities, energy capacity, etc. I mean, you guys have done previously, you know, sort of contracted capacity outside of

Speaker Change: you know, the traditional vertically integrated utility construct. Is that another avenue here, that when you think about serving your evolving loads in novel ways, is that something you could be looking to do, is have long-term contracts with them directly?

Speaker Change: It's kind of an all of the above approach, yes, and that would be one of them.

Speaker Change: got it yep awesome all right I'll leave it there speak to you guys soon thank you thank you Julian

Speaker Change: Thank you, and as a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced.

Speaker Change: And I'm not showing any further questions. I would now like to turn the call back over to Linn Evans for any closing remarks.

Linn Evans: Our hearts certainly go out to those communities, and I really just thank our team.

Linn Evans: and how well they represented our values, represented our culture, and came to the rescue, if you will, to make sure we have safe, reliable, and resilient energy and energy for our customers. So thank you for that. I want to emphasize our positive results for the...

Linn Evans: Our customer growth continues.

Linn Evans: We're very excited as you can tell about continuous serve data centers and blockchain loads

Speaker Change: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Speaker Change: [inaudible]