Black Hills Corporation (BKH) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Black Hills Corporation Third Quarter 2017 Earnings Conference Call. My name is Vitoria and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now like to turn the presentation over to Mr. Jerome Nichols, Director of Investor Relations of Black Hills Corporation. Please proceed sir.

Thank you, Vitoria. Good morning everyone, welcome to Black Hills Corporation's third quarter 2017 earnings conference call. Before we begin today, I would like to note that Black Hills' will be attending EEI Financial Conference starting November 5, in Lake Buena Vista, Florida. The company will host one-by-one meetings and deliver presentation to investors on Tuesday, November 7. Our presentation material and webcast information will be posted on our website at www.blackhillscorp.com under the Investor Relations heading after market close today. Leading our quarterly earnings discussion today are David Emery, Chairman and Chief Executive Officer; and Rich Kinzley, Senior Vice President and Chief Financial Officer. During our earnings discussion today, some of the comments we make may contain forward-looking statements as defined by the Securities and Exchange Commission, and there are a number of uncertainties inherent in such comments. Although we believe that our expectations and beliefs are based on reasonable assumptions, actual results may differ materially. We direct you to our earnings release, Slide 2 of the investor presentation on our website, and our most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission, for a list of some of the factors that could cause future results to differ materially from our expectations. I will now turn the call over to David Emery.

Thank you, Jerome. Good morning, everyone. Thanks for joining us for our third quarter call this morning. For those of you following along on the slide deck for the webcast, I will be starting on Slide 3. The agenda today will follow format similar to that we followed in previous quarters. I will give a quick update on the quarter, Rich Kinzley our CFO will give the financial update for the quarter and then I'll hit on long-term strategic issues and then we’ll take questions. Moving on to Slide 5. Third quarter earnings per share from continuing operations as adjusted were $0.50 per share that's about 4% improvement compared to $0.48 per share in the third quarter of last year. And despite an improvement earnings were lower than our expectations. From an operational and strategic perspective however we had a great quarter and we demonstrated really strong cost control while achieving excellent operational metrics such as power plant availability and safety. Also from a strategic perspective we finalized the key decision to exit the oil and gas business. We increased our dividend for the second time this year and continued to make excellent progress on several other key initiatives including revising upward the future capital investment we believe will be necessary to serve our customers. Third quarter highlights on Slide 5, starting with our utilities. On 3 October Rocky Mountain Natural Gas which is our intrastate gas transmission pipeline in Colorado filed a rate review with the Colorado PUC seeking to increase annual revenues by approximately $2 million. In September the Mountain West Transmission Group which includes our three electric utilities of Black Hills Corporation plus seven other electric providers in the region announced its interest in joining the Southwest Power Pool RTO. If membership is deemed beneficial both by the members of the Rocky Mount Transmission Group and the existing members of SPP, we’ll prepare filings with FERC and State Public Utilities Commission's in mid-2018, hopefully gaining approval and actually integrating our group into SPP in late 2019. On August 4 our Colorado electric subsidiary received bids related to a request for proposals we had issued earlier seeking another 60 megawatts of renewable energy resources that will be in service by 2019 in order to meet Colorado's renewable energy requirements. We are currently evaluating bids with the assistance of an independent bit evaluator and we plan to present the results to the Colorado PUC by year-end for their approval. We did submit some bids of our own into that RFP. Moving on to Slide 6 and continuing with utility highlights. On July 19, our Wyoming Electric subsidiaries set a new all-time peak load of 249 megawatts, that's more than 5% higher than the previous peak which was set last July. Shifting gears to the non-regulated side of the business our Oil and Gas subsidiary. On November 1, our Board approved the sale of all remaining oil and gas assets and an exit of that business. Beginning in the fourth quarter that segment will be reported as discontinued operations. We retained advisors to support our ongoing property sales efforts and we plan to divest all of our remaining properties as soon as practical but no later than the end of '18. Very recently we signed agreements to sell our operated San Juan Basin natural gas assets in New Mexico and a portion of our Powder River Basin assets in Wyoming namely a handful of operating oil wells and some exploration acreage for a combined total of $28 million. Moving on to Slide 7, our corporate highlights for the quarter. On November 1, our Board of Directors moved up our 2018 dividend increase by one quarter and approved a 6.7% or $0.03 per share increase in the quarterly dividend to $0.4705 per share. The total dividend payout for 2017 will be a $1.81. Also during the quarter both Fitch and S&P affirmed their investment grade credit ratings for the company. We filed our new shelf registration statement and renewed our ATM equity program. Slide 8 provides a reconciliation of our third quarter net income from continuing operations as adjusted compared to the third quarter of last year. As Rich goes through his financial update, he will provide the details on the individual segments in his report. I’ll now turn it over to Rich. Rich?

Thanks Dave and good morning everyone. I’ll jump right in on Slide 10 where we reconciled GAAP earnings to earnings as adjusted a non-GAAP measure. We do this to isolate special items and communicate earnings better representing our ongoing performance. We display the last five quarters and trailing 12 months as of September 30 for 2017 and 2016. As detailed on the Slide we experience special items not reflective of our ongoing performance in each of the last 5 quarters. The first special item is non-cash asset impairments at our oil and gas business that occurred last year. The second special item is acquisition related expenses such as advisory fees, financing and other third party consulting costs associated with the SourceGas acquisition and integration. We completed nearly all the integration work related to the acquisition in 2016 and are finishing the few remaining projects in 2017. These acquisition related costs and non-cash impairments are not indicative of our ongoing performance and accordingly we reflect them on an as adjusted basis. Our third quarter as adjusted EPS was $0.50 as compared to $0.48 last year. Despite year-over-year growth, third quarter results fell short of our expectations as Dave already mentioned. Specifically, we experienced lower gross margins at our gas utilities related to agricultural irrigation loads, and at our electric utilities commercial and industrial gross margin growth didn't materializes as we had expected. As a result, we lowered our 2017 earnings guidance yesterday. I will discuss these various items and our guidance for 2017 and 2018 in more detail on the following slides. At the bottom of the slide, we present EPS as adjusted for the trailing 12 months. As shown, we achieved EPS as adjusted growth of $0.58, a 21% increase for the trailing 12 months ended September 30, 2017 compared to the trailing 12 months ended September 30, 2016. The trailing 12 months earnings uplift is due primarily to a full 12 months ownership of the SourceGas utilities which were acquired in mid-February last year. Turning to Slide 11, you see our third quarter revenue and operating income compared to last year. On the left side of the slide, you'll note that 2017 revenues for Q3 exceeded those in 2016 by 2.5% due to revenue improvements at each of our business segments except oil and gas. On the right side of slide you'll see that year-over-year operating income increased by 4%. The operating income improvement was driven by increases at our electric utility mining and corporate segments. These improvements were partially offset by quarter-over-quarter decreases in operating income at our gas utility, power generation and oil and gas segments. I'll discuss each of the operating segments in more detail later. The corporate segment improvement relates to the reduction of internal labor charges in 2017 to acquisition and integration activities as compared to 2016. As I noted on the previous slide with the integration of SourceGas substantially complete, our employees have largely moved on to other projects and initiatives and the associated internal labor costs are predominately been charged to our utility segments in 2017. Slide 12 displays our third quarter income statement. Gross margin is up 1% this quarter compared to the same quarter last year reflecting improvements of the electric utilities and mining segments with other segments essentially flat or slightly down. We reduced Q3 operating expenses compared to last year despite normal inflationary pressures, as we continue to achieve acquisition related synergies and other efficiency improvements. DD&A increased slightly on additional plant in service balances. Before special items operating income increased 4%. For Q3 2017 the only special item was minimal acquisition related costs. Last year Q3 included special items for oil and gas impairments and more significant acquisition related costs. For below the line items interest expense for the quarter was relatively flat to prior year's Q3 debt balances were consistent year-over-year. The effective tax rate for the quarter was 30.4% below the 35% statutory rate. There are variety of items contributing to lower effective tax rate, the largest of which is production tax credits at our Peak View Wind farm in Colorado. The line item for non-controlling interest reflects our sale of a 49.9% interest in Colorado IPP in Q2 last year. I’ll talk more about this on the PowerGen slide. Moving to the as adjusted net income line, we reported $27.9 million for the quarter compared to $26 million for Q3 2016, a 7% increase. Diluted shares increased by $1.7 million or 3% in Q3 2017 over Q3 2016 due to two factors. First, approximately $1.1 million additional weighted average shares are included in Q3 2017 compared to Q3 2016 from issuances of equity through our equity offering program in 2016. Second is the accounting application of the treasury stock method related to our unit mandatory convertible securities. We issued the unit mandatory's in Q4 2015 to help fund the SourceGas acquisition and these will be converted from debt-to-equity prior to November 1, 2018 resulting in approximately $6.3 million additional shares being added to our basic share count. Until that conversion occurs, we are effectively phasing in the dilution through the treasury stock method. Whereby if the average stock price during the reporting period is above the reference price, a portion of the dilutive effect is reflected in the fully diluted share account. With the reference stock price of $47.29 and an average share price of $69.42 in Q3 2017, and $60.92 in Q3 2016 we're required to add approximately 2 million shares to the Q3 2017 diluted share count compared to approximately $1.4 million shares in Q3 2016. Finally at the bottom of the slide you'll see that the Q3 EBITDA increased by $3.1 million quarter-over-quarter about 2.5%. Moving to Slide 13 on the left side it displays our electric utilities gross margin and operating income. Electric utilities gross margin increased $7.1 million in the third quarter over Q3 2016. The gross margin increase resulted primarily from returns on our Peak View Wind Project which went into service in Q4 2016 and transmission and other investments. Operating income increased $2.6 million or approximately 5% for the third quarter compared to 2016. Operating expenses including depreciation were $4.5 million higher as a result of expenses associated with our new generation and transmission investments, plus higher generation outage and major maintenance expense. Also depreciation of property taxes increased over 2016 given the investments made. I’ll also note that a substantial component of the return on our Peak View Wind Project is realized through production tax credits which are reflected in reduced income taxes rather than through operating income. These credits to our income tax amounted to over $700,000 in the third quarter and approximately $3.2 million year-to-date. Moving to the right side of Slide 13, the results at our gas utilities for the third quarter reflect a decrease of $2.3 million in operating income. Q3 gross margin was unfavorable to last year by $2.1 million primarily because margins from our agricultural irrigation customers were lower due to different weather conditions in Q3 2017 as compared to Q3 2016. This is our second year with the SourceGas utilities and we continue to learn the nuances of these businesses compared to our legacy gas utilities. The SourceGas utilities have a substantial number of agricultural customers who use natural gas to drive their irrigation units. Last year the weather was hot and dry in the service territories during the third quarter which required heavy natural gas usage for irrigation. This year the weather was more normal in those service territories. We estimate the impact of reduced irrigation to our gross margins was more than 3 million negative comparing Q3 2017 to Q3 2016. On the expense side, gas utility operating expenses were effectively flat year-over-year for Q3. Because 2017 is the first complete year of our ownership of the SourceGas utilities, I’ll spend on the September year-to-date results of the gas utilities. The gas utility saw an increase of 22.6 million in operating income comparing the first three quarters of 2017 to the first three quarters of 2016 with most of this increase attributed to the addition of SourceGas. We closed the acquisition on February 12, 2016 so we picked up 42 days of SourceGas operating results in Q1 2017, as compared to last year. At our legacy Black Hills gas utility operations, operating income improved by over 7 million for the first three quarters of the year, a 13% growth rate year-over-year benefiting from strong cost management, as well as synergies realized from the SourceGas acquisition. Next I’ll talk about weather and its financial impacts of both our electric and gas utilities when compared to normal. In the third quarter our electric and gas utilities results were not materially impacted by weather other than related to the irrigation load I just talked. Year-to-date through 9 months weather negatively impacted our gas utility gross margins by an estimated $6.3 million and our electric utilities margin by an estimated $1.2 million mainly due to mild weather during the heating season in the first half of the year. As I noted earlier, the irrigation customers use less natural gas irrigating fields this year compared to last year negatively impacting margins by $3 million year-over-year for Q3. It's difficult to compare actual irrigation load to a load resulting from normal weather what we believe this year's volumes for that particular load were close to normal. On the left side of Slide 14, you'll see that power generation was flat year-over-year. PowerGen business unit continues to realize strong contract availability with its generating units and continued its cash flow contributions to Black Hills. Our power generation segment includes the Colorado IPP plant which is contracted to our Colorado electric utility, plus the Y gen one plant which is contracted to our Wyoming electric utility. Colorado IPP accounts for approximately 60% of the operating income in our power generation segment. The numbers reflected on Slide 14 include 100% ownership of Colorado IPP. In April 2016 we sold 49.9% interest in Colorado IPP. We consolidate 100% of Colorado IPPs results in our financials and then back out the 49.9% non-controlling interest at the bottom of the income statement. On the right side of Slide 14 you'll note our mining segment had a slight increase in operating income compared to the third quarter last year. Our mine continues to perform at a high level with sales almost entirely to on-site mine generation roughly half our sales based on cost plus contract pricing mechanism. Moving to oil and gas on Slide 15 we had an operating loss in the third quarter of $1.9 million compared to an operating loss of $1.4 million for Q3 2016 excluding asset impairment charges taken last year. Third quarter volume sold decreased as oil and gas production declined from the prior year primarily due to property divestitures. The decrease in revenue from lower volumes was partially offset by lower operating expenses and lower DD&A. Since we now formally plan to exit the oil and gas business, we will begin to report this segment as discontinued operations beginning in the fourth quarter. I’ll point out that as you look at the historic and forward earnings benefit to consolidated continuing operations once oil and gas is reported as discontinued, it will not be as simple as adding back the operating loss from this segment. Approximately half of the $7.5 million year-to-date operating loss from our oil and gas segment is a result of allocated corporate costs. Beginning with our reporting of fourth quarter results in our 2017 10K most of these allocated costs will be retained within continuing operations since they will continue to be incurred and will be reallocated among our remaining business units. Dave will talk more about our exit strategy for the oil and gas segment shortly. Slide 16 shows our capitalization, as we look through 2018 we expect our debt to total cap ratio to decline through growth and stockholders equity from earnings. We don't expect to add any significant debt in the near term as our internally generated cash flows will largely fund our CapEx and dividends and dividends through 2018. Additionally the 299 million of unit mandatory's I mentioned earlier are reported as debt on our balance sheet until the units convert to equity. By year-end 2018 we expect our net debt to cap ratio to be under 60%. I’ll also mention that on the equity side we haven't issued any shares under our - at the market equity offering program in 2017. As Dave mentioned we renewed the program and will keep it active to provide financing flexibility as we move forward but we intent to issue very few if any shares through the program in the near-term. Slide 17 demonstrates that we are in good shape relative to upcoming debt maturities. The first quarter last year we executed significant debt financings to help fund the SourceGas acquisition. In the third quarter last year we accessed the debt markets at a time when credit conditions were beneficial to successfully refinance debt we assume through the acquisition and term out other upcoming maturities. We also successfully implemented a commercial paper program in Q1 this year which helped to minimize short term borrowing costs. Slide 18 shows our current credit ratings. As you can see on the slide, Fitch recently affirmed the their BBB plus rating with a stable outlook and we are rated BAA2 with a stable outlook from Moody's and BBB with a stable outlook from S&P. We are committed to maintaining our investment grade credit ratings with BBB flat to BBB plus equivalent being our target. Our forward-looking metrics support these ratings. Slide 19 illustrates our track record of growing operating earnings and EPS. Our history shows periods where our earnings growth is occasionally lower for short periods of time but our long-term trend of growing earnings is excellent. Moving to Slide 20, we reduced our full-year earnings from continuing operations as adjusted to a range of $3.30 to $3.40 per share. We lowered our 2017 range to reflect the number of items. First, the negative impact from the lower agricultural irrigation demand in our gas utilities in Q3 relative to our performance in the prior year as I mentioned earlier. Second, our forecast utilized for the previous earnings guidance range included commercial and industrial load at our electric utilities that didn't materialize. Third, we included pricing and volume assumptions for some of the SourceGas utilities that did not properly reflect the tariffs in place. Our aggressive synergy realization and cost control across the organization in 2017 mask the fact that these gross margin assumptions were not being fully realized through the first half of the year. However, as we closed the books for the third quarter it became apparent that actual margins were short of our expectations. Additionally, we had to recognize approximately 600,000 more shares in our diluted share count in 2017 than what our original assumptions included due to our strong year-to-date stock price performance and the resulting impact of the treasury stock accounting method associated with our unit mandatory securities. Finally, our June 2017 settlement agreement with the South Dakota PUC requires us to amortize certain costs over six years beginning July 1, 2017 resulting in approximately 1.3 million of additional amortization in 2017 that our original assumptions did not consider. We've updated all these assumptions for the remainder of 2017 and in our 2018 earnings guidance which brings me to Slide 21. In yesterday's press release we initiated our guidance for 2018 earnings from continuing operations as adjusted to be in the range of $3.35 to $3.55 per share. The assumptions for the 2018 earnings guidance range are listed in the press release and on Slide 21. One item I'd like to further clarify is the effect on our share count related to the unit mandatory securities. When we do the conversion from debt to equity, 6.3 million shares will be added to our basic share count. As I noted earlier, we are already phasing in some of this dilution into our share count in 2017 to roughly 2 million shares. In 2018, until the conversion occurs we will continue to apply the treasury stock method of accounting for these securities. So as an example, if we did the conversion on September 30 of 2018, for the first three quarters of 2018 we would apply the treasury stock method and for the fourth quarter we would see the full impact of the 6.3 million shares. When you do all that math and vary around numbers and assuming a consistent stock price, approximately 2 million shares of the dilution from the unit mandatories will impact 2017, approximately 3 million shares of dilution will impact 2018, and the full 6.3 million share dilution will be reflected in 2019. Of course the number of shares ultimately recognized in our fully diluted share count will depend on the timing of the conversion and the actual average share price until the conversion occurs. In closing, I’ll mention that we've continued to refine the CapEx opportunities across our utility service territories and have increased 2018 CapEx in our assumptions from the levels we disclose at Analyst Day in early October. Dave is going to cover this in more detail shortly but the increased capital combined with the increased dividend will continue to deliver value for our shareholders. And with that, I’m going to turn it back to Dave for his strategic overview.

Thank you, Rich. Moving on long-term strategy on Slide 23, consistent with the last several years we group our strategic goals into four major categories profitable growth, valued service, better every day and great workplace with the overall objective of being an industry leader in all that we do. Slide 24,we discussed this concept quite a bit at Analyst Day from a strategy execution perspective, there is only three key issues listed on this slide and the two that follow. First we target a long-term total shareholder return in the top quartile of the industry. We plan to accomplish that by achieving long-term earnings per share growth in the top quartile targeting 50% to 60% dividend payout ratio while retaining the flexibility to increase the dividend during periods of slower EPS growth and then we plan to continue our track record of 47 consecutive annual dividend increase. On Slide 27, the second item related to strategy execution we are in a period for the next couple of years where we’re transitioning our earnings drivers from an acquisition and integration focus back to a more traditional utility growth strategy. So in closing, the SourceGas acquisition in February of '16, we've had relatively slower earnings growth expectations by heavy emphasis on SourceGas acquisition and the associated integration savings, very focused capital spending to reduce regulatory lag and minimal rate review filings. Over the next couple years we will be transitioning back to relatively higher earnings growth expectations, much stronger capital investments to meet our customer needs, and more regular rate review filings associated with that capital investment. We will still focus on further business standardization and efficiency improvements as we go forward. On Slide 26 related to strategy execution is that our fuel and service territory diversity really reduces business risk and drives more predictable earnings. We like both the diversity and fuel between the gas and electric and our diversification by regulatory jurisdiction. No single state has a huge impact on our overall results. Moving on to Slide 27, our past utility acquisitions have created a much larger transmission and distribution system both on the electric and the gas side. With that increase in size comes increased opportunity for investment to serve our much larger customer base. Our long-term capital investment requirement to serve our customers is even greater than we thought when we purchased and integrated SourceGas. Moving on to Slide 28, strong capital spending has and will continue to drive much of our earnings growth. Since the second quarter results and our announcement and our Analyst Day discussion, we continue to refine our capital investment needs that will be required to serve our customers into the future. As a result of that review we've increased our forecasted 2017 through 2019 total capital spending by an additional $100 million to a total of nearly 1.3 billion, a lot of that capital will be spent on growth and the line replacements at our gas utilities, as well as the additional transmission and other items on the electric side. Slide 29 illustrates our historical capital spending in depreciation amounts. Importantly, capital spending far exceeds depreciation helping contribute to both rate base and earnings growth. Slide 30 provides a regulatory update for several of our utilities. We're continuing our appeal of the Colorado PUCs decision related to our 2016 rate review. That review is related primarily to a simple cycle turban we added at our Pueblo airport generating station. In July we filed an appeal with the Denver County District Court of the briefing schedule related to that filing runs through November and then the timing of the ruling is uncertain thereafter. As I mentioned earlier, Rocky Mountain Natural Gas filed a rate review request with the Colorado PUC to recover a lot of investments we made for safety and integrity of our pipeline system during the last three years. That review increased annual revenue by $2 million, and finally we expect to make two additional rate review filings prior to the end of 2017, one of those as for our Northwest Wyoming gas utility that we acquired back in 2015 and the other is for the Arkansas gas utility that we acquired from SourceGas, we've seen very strong growth in our Arkansas service territory by driving added expenses and a lot of capital investment. On Slide 31 as I stated earlier, we plan to exit oil and gas business before the end of 2018. Till that end that and we continue to divest assets. Recently agreeing as I said earlier to sell our San Juan Basin assets in New Mexico and some of our Powder River Basin assets for a combined $28 million. Both of those deals have been signed not yet finally closed. Slide 32 illustrates our progress towards divesting our oil and gas wells. We show this slide an Analyst Day and it previously illustrated progress towards divesting non-core assets only. With the recent decision to exit the business, we revived the slide to illustrate our progress toward a divestiture of all oil and gas properties. As you can see, we've already sold nearly half of our total properties in oil and gas site. On Slide 33 related to the dividend, we're extremely proud of our dividend track record and we've increased our annual dividend to shareholders for 47 consecutive years. Also as I noted earlier, we have flexibility to use relatively larger dividend increases during periods of relatively low earnings growth. As you can see even after two relatively large dividend increases during 2017, we're still well within our targeted 50% to 60% dividend payout range giving us future flexibility as well. On Slide 34 and we focus every day on operational excellence, and also focus on helping our nearly 800 communities that we serve to grow and thrive. Slide 35 is our 2017 scorecard, the scorecards our way of holding ourselves accountable to you our shareholders. We've done this for several years now or we set forth our goals at the beginning of the year and provide regular updates to you related to our progress. Finally, in conclusion while our near-term's earnings guidance is lower than we would prefer, the flexibility we have to raise the dividend of the increase capital necessary to serve our customers and the exit of the oil and gas business set us up to continue delivering excellent long-term value for our shareholders. That concludes our remarks. We're happy to take questions.

[Operator Instructions] The first question comes from Michael Weinstein of Credit Suisse. Your line is now open.

First question about the comment you made about gross margin that SourceGas now being what was expected to the first part of the year and that they were being masked by synergies, maybe you could clarify that a little bit more, I mean I am assuming that if unless you’re you trying to save the synergies disappearing going forward, shouldn't be I guess the masking continue. What you exactly are you saying about forward guidance, and are you going to have to restate anything for the previous part of the year?

No, I think the comment was more that we've done a really good job achieving the synergies, the targets that we thought we’re going to hit with the acquisition we have, and earnings to two quarters were what we’ve expected. The third quarter, you have a lot of construction going on, there were some commercial loads that we expected in industrial in our electrics that just haven’t materialized, and then the irrigation issue that I talked about a couple of times during the call you know surprised us I guess in the third quarter when we closed the books, those are the big drivers Dave would you add on that.

That's right, Mike I think if you look at the SourceGas acquisition I would say some of the agricultural loads in particular or probably not as accurate in forecasting as we would like to be. We’re getting a lot better at it very quickly, but it's been a bit of a challenge for us that's a much larger portion of their business then it was of ours in some of those things states. That being said, I think as we look at the capital investment opportunities for the SourceGas properties we've acquired, we’re very excited about those, and that's driving part of the increasing $100 million in capital spending in the next couple of years states like Arkansas are growing very rapidly and we're excited about that. You know overall, I would say net positive, the timing is the issue.

What about the - the fact that I guess 2018 guidance only about 3% about 2017 guidance. So those factors I guess are going to continue into next year and your guidance is that, am I right to think about it?

Yes, I think Rich made the comment that all those adjustments that we made, we've made on a forward basis to the extent that they continue right they don't all. Some of them are more short-term and some are longer-term we try to account for all of that. As we've gone through all that then we revisited and we've talked about this little bit at Analyst Day, we revisited our schedule when we’re going to need rate reviews in all of our jurisdictions, that's based on capital investment, cost trends, revenue trends et cetera. A lot of the increase in capital spending is driving a need for rate cases earlier than we thought we would. So that's changing the dynamic on, you know - when our savings are realized versus when the capital investment and the increase in rate basis realized, the timing is changing and some of those things. Largely due to increase in capital spending that's been necessary sooner than we thought it was going to be which is good thing in a long run, it's just timing issue.

Which negative factors do you think will disappear or could disappear if mitigated by 2019?

I mean, some of those, it is hard to say, but certainly weather is a variability that - our ability to forecast I think it is getting better and understand what it means particularly on the agricultural side. You know the other factors I think we continue to work on cost, we continue to work on standardization of our business that's very helpful and we've got several initiatives on that front. So I think as time progresses, we'll continue to get more and more efficient. Those things I think will continue forward in a positive way. We have revisited our load forecasts and things some of those are timing, some of its load that we just don't think going to show off. We visit with customers every year and prepare those forecast based on what they know about the business. We generally review those ourselves and handicap them some, they are typically always more optimistic than we are, but in this case some of those loads will materialize just later and some of them won't materialize at all or not for several years and we're trying to build all that into our forward forecast.

And when you think about your top tier earnings growth target is that a three year target or five-year target I mean maybe a little more clarity that how you're thinking about that?

We use a term, long-term which means it certainly is in one year or a two-year, but it’s a rolling probably three to five year period. We're not defining it super robustly but, when you look at utilities there is typically fluctuations in earnings from year-to-year given build cycles et cetera. So averaging over at least the three-year window I think is appropriate depending on what's going on maybe a year longer than that. But, we feel pretty good about our ability to invest like capital and that’s needed to serve our customers and I realize the benefits from doing that.

And on the apparent drag that’s going to remain after the sale - distillation of E&P about a nickel am I reading that right, what I heard?

About a half win are loses for this year roughly…

$0.10 of the loss, right, so half…

We are $7.5 million operating loss through three quarters, that's probably fairly linear for the year, and about half of its retained.

I guess it's a little bit of struggle in understanding the margins coming from SourceGas, does this, and you know the longer period I think it’s going to take to get to top Tier earnings growth with the existing assets. How does this change your view of M&A going forward, so I think in the past you’ve been kind of indicating that you're interested in it and I'm wondering if that's changed now?

Yes, I don’t think it’s really changed our outlook on M&A at all. You know what we’ve said earlier and we had a good discussion about this at Analyst Day as you know the smaller things that we can buy easily given our capital structure today and integrate them quickly, we will continue to look at those and we are. We keep looking at some of the smaller municipals systems and other things. The larger transactions until we get our balance sheet back a little bit closer to where we need to be from a debt-to-cap standpoint, which will be later this year or next year when the equity units converted. It’s going to be hard for us to compete for a large one. We just wouldn’t be a little apply the leverage necessary to be competitive if it's an open bid type process which we've been seeing, pretty frequently lately. So, I don't think it has any bearing on our readiness to acquire or anything else. I think we're pretty confident in our ability to buy and integrate utilities, it's just the timing of the timing kind of the same as it has been for the last year so when we had those discussion.

I will add to that, we’ve been pretty clear, it’s going to be the right fit if it's a big one right with SourceGas was we still feel very good about that acquisition because of the capital opportunities Dave has talked about and the synergies we could already achieve. But looking forward for a big one it’s going to be the right fit. I mean, we are not - you know looking to buy anything it's got to be the right fit.

Hope we’re very disciplined, right.

The next question comes from Insoo Kim of RBC Capital Markets. Your line is open.

Maybe just to follow up on Michael's question on the stuff that goes into the drivers for the guidance. I know, you know it's agricultural customer impact some C&I low growth and then the margin stuff that you've mentioned. So, that’s just - I guess that implies that the O&M synergies that you guys achieved are still there which means I guess when you are going for rate cases in the next year so you'll still have to work through managing to get back of the O&M synergies while you earned, while you are offsetting that with CapEx, is that a fair assumption?

Yes.

And then just the level of the margin stuff that you mentioned was it, it seems like that's still the bulk of what made the change given I think the agricultural customer stuff was $3 million impact for the quarter and I don’t know if you detailed with the C&I low growth changes versus…

No, we haven't done it.

Okay.

But I think they are key drivers obviously.

And then as you said the, I guess the E&P get $0.05 to $0.06 and if it’s already incorporating into 2018 it just seems like when I was doing back of the envelope math on the guidance that you guys gave initially it seemed like a reset of the allowed the earned ROEs closer to be allowed but with the I'm just a bit confused because on top of that it seems like there's comments on the margin assumptions that are going to change so I don’t know how that fits into your thinking just kind of stating my mind - there is a long way say I am bit confused?

Yes, a lot of bit I think Insoo is kind of related to exploration Michael and that is the timing right. We’ve spent more money invested more things sooner than we thought we would have to which is driving us to file for rate reviews sooner because we made a lot more investments for our customers sooner than we originally thought we would have to. In the grand scheme of things that's very positive it's just essentially a timing difference. So your question on synergy retention versus the next rate review and the capital investment that offsets that from a revenue standpoint that that's really the issue is about timing of that occurring more so than anything else.

The next question is from Julien Dumoulin-Smith of Bank of America. Your line is open.

So I don’t mean to beat too much on this but I’d love to hear how do you think about the year-over-year comparison of average share increases outstanding into 2019 versus 2018 obviously given the commentary for little bit more rolling in now. Net-net what's the actually ultimate increase into 2019 that you think about it?

Yes, well if you look at our basic share count Julian just add 6.3 million to it I mean that's the simple answer if you look at today's basic share count for 2019 if you add 6.3 million shares to that that's what are share counts is going to be in 2019 because this treasury method thing will go away when that convert occurs? That make sense.

Yes absolutely yeah that’s all very straightforward…

Well one clarification it's not today's fully diluted share count if you add the 6.2 million is the basic.

And math courses assume there is no additional large capital investment or anything else that would lead us we have to use our ATM program we’ve said we don't plan to issue many shares under that right. If we were to announce a big project or something we may have to do that.

And there are a few other little things that impact fully diluted share count but this treasury method is the big one right now on the unit.

Can I follow up a little bit on that Dave because you commented about improving credit core rate I think in your opening remarks is there a potential that you accelerate CapEx in the near term here and is there anything that we should be following here that could result in that obviously this RFP could that drive CapEx as soon as 2018 to shift your financing plan?

Well it’s possible we don't expect it today if we had a project to announce we’d announce it but certainly the one item that’s not in our forecast is if we end up doing something where we would own a portion and all of the renewable for Colorado I'm not sure that would necessarily drive the need to issue more equity but that’s something we could determine. We’re always looking at projects though and we’re doing some integrated resource planning for other electric utilities in Wyoming and South Dakota are actively doing that Wyoming right now so there's always a chance another opportunity could come along absent that we said that we expect to use our ATM program very minimally and have just a little bit of incremental shares coming in through the drip plan. And that's our intent today but you know that’s always subject to change we have increased and we said that today our two year plus this year but really two years and a couple months capital spending plan by a little over $100 million just on this call today. So that's a good thing from a long-term earnings growth perspective.

Let me just clarify this about the oil and gas business and earnings reflected in this guide. When you think about the timing here if you were to sell the remainder of the business let’s say tomorrow such that you had full year X anything. How much of an uplift in your guide would you see from that ultimately here. Obviously sort of appreciating the allocated SG&A piece here that's really what I'm trying to understand?

Well the earnings guidance range that we put out for 2017 and 2018 basically reflect E&P or oil and gas as a discontinued operation Julian so there is no additional uplift when we start reporting that as disco ops?

But would that change your SG&A allocations such that you would see a shift in your core earnings sorry that’s what are really was getting at?

No we’d kind of factored that into the guidance already basically when we start reporting that as a discontinued operation with our fourth quarter results and our 10-K and then next year with all our Qs that G&A that we are retaining will be reallocated back to the other businesses, but the E&P direct loss will be under – or below line as a discontinued operation.

Got it.

The guidance numbers we issued take that all into account, there is no additional uplift from the fact that that’s it going to be disco ops.

The reallocation I think it’s a timing issue its really your question Julian the reallocation of that allocated corporate cost that is going to oil and gas now stops immediately once we start recording as discontinued operation which is essentially now right. So for Q4.

So the reallocation in terms of timing when you thought doesn’t really matter you already affectively done that reflected in your 2018 guide?

Yes correct, correct.

Right, sorry absolutely.

Just to clarify this obviously you’ve accelerated your rate cases is there an angle in which 2019 versus 2018 just kind of I think for you a little bit or 20 could you see yet again an improving trend in the earned ROE off of what you're talking about today are talking about kind of stabilizing the rent ROE where we are?

In aggregate that’s kind of hard question to answer I think what we see is the opportunity to file for rate reviews which would suggest we need one in several of those territories. So I think that that would lead you to think at least in the areas where we have to file one that we need and improvement but as time goes on and you have continued growth and you don’t file our rate case your other territories gradually get lower, right and that is hard - we file rate cases for.

It wouldn’t be decisive shall we say to the extent to which if they there were to be an improving?

No we’re reasonable.

The next question is from Christopher Turnure of JPMorgan. Your line is open.

I just wanted to clarify foreseeable in the fourth quarter of this year. If we compare it to the fourth quarter of last year you're going to have a nice tailwind I think from a normalized weather if that's the case do you have a at least a small tailwind from the E&P business non-corporate direct piece going away but if I'm doing the math correctly are there still a pretty substantial drop there year-over-year. Is that basically due to the factors that you detailed for the lowering of the full year 2017 numbers is it all really that back weighted?

Well the third quarter is certainly as we described wasn't to our satisfaction and some of those factors are carrying into the fourth quarter Chris. Weather, hard to say if we’re going to get an uplift there or not it's Golden Rapid City and our other service territories today but we get two more months to go through.

So normal weather would be very welcome and I know obviously the reason for the range still is largely weathered dependent for our 2017 guidance range.

And are you prepared to give the number for the South Dakota amortization that you mentioned and the impact to the full year or 2018?

What I indicated in my comments was for the second - we had to start that amortization on July, it’s a six year amortization period and it's $1.3 million for the second half of 2017 and you'll see in the Q there's some when the Q comes out later today there's some disclosure on that that should help you with that.

Is that reflective of kind of a half year run rate?

Yes, basically.

And that’s a pretax number?

Correct.

And then just to maybe assuming that a little bit on the irrigation customers and some of the C&I load that's fallen short on the electric demand side I appreciate you guys being honest there about miss forecasting a little bit but kind of going into those rate cases that you previously done in those jurisdictions, was it more that you had priced in at peak to kind of what was going on and didn’t expect that decline. And then you know absent the cost cut impacts that are going to have to be given back to customers do you not have a chance to get a fair shot at earning an authorized ROE going forward once you get those rates reset?

I think we feel pretty good about when we end up increasing our spending and going in for additional rate reviews we feel pretty good about where we’re at. Really the issue isn't about what we are earning as much as what we thought we would earn. We had some loads we work with particularly some of our larger commercial and industrial customers at what their loads will be and try to forecast those quarter-over-quarter and a lot of that activity like when they're adding on to facilities, expanding facilities a lot of that stuff tends to happen in the summertime. And a lot of - some of that work got pushed out and isn't going to get materialized and a couple other things that we thought would happen we don't know if they are going to happen now some of them it's just taking longer. All of that been kind of factored into our forward forecast.

And on the agriculture Chris, I said in my comments this is well but last year was pretty hot and dry particularly in Nebraska where there's a lot of center pivot irrigations in those SourceGas service territories. And we knew we got some uplift from that last year, we didn't realize the extent to which that was the case this year was probably more normal and that's 3 plus million dollar delta.

It’s not as simple as heating or cooling degree Dave. Its moisture related issue and a lot - and the timing of those makes really big difference and that's what we’re really getting our arms around on the forecasting side.

I know it's hard to generalize but I guess if things were maybe pretty strong last year and then they’re obviously not so strong this year, is it fair to say that the overall volume on the electric or gas side as you currently expected to be is kind of in line with what's baked into the last rate case cycle or is it below the last rate case cycle?

Depends on the jurisdiction.

Yes depends on jurisdiction. That’s a hard one to generalize I think Chris.

The next question is from Lasan Johong of Auvila Research Consulting. Your line is open.

Just few questions on the oil and gas side, I think you might be expecting some of these. The valuation on the [indiscernible] sale can you tell me what it was on the MCF basis?

No, we haven't disclosed that yet. As I mentioned earlier we literally just signed those and have not closed them yet. So terms specifics, buyer's specific location all that are going to be disclosed yes if at all.

I am assuming you're going to deal opening up in data room?

Yes, what we've done Lasan we’re not going to sell the whole company in a single transaction. So the advisors we've engaged to sell a couple specific properties. So they're not huge transactions that are going to probably attract a lot of large buyers. We think that's the optimum way given the properties we have left to divest those. So we will have a data room or two likely but basically the sales of single assets. So one deal or one area or something like that and that will happen over the next…

I just slipped into the main event guys, the Mancos Shell how much of that has been recorded as proved underdeveloped?

Very little, if you look at our overall reserve report we have almost no proof underdeveloped reserves on our books there's some - that’s detailed in the 10-K very little. You would classify most of our assets as probable or possible and at current price levels a lot of them probably wouldn't be categorized as either probable or possible because by definition reserves mean it's economical to recover at current price. So that's the definition of a reserve. So we would categorize a lot of those as a resource right now rather than a reserve either probable or possible.

So then despite the nine wells that you drilled there, what you’re saying not actually saying is that the pricing on the Mancos Shell is likely be going as if it were even speculative reserves or possible reserves but not as PUDs?

Correct, but they are not PUDs.

The last question will come from Joe Zhou of Avon Capital. Your line is open.

So I just have a question - so first on share count and I think shall I use 60 million plus or minus?

Well if you take our basic share count add 6.3 million that’s about where you're at.

And second question is at your midpoint of 2018 guidance which is - I’ll take 3.45. Do you still see your confident that with this share count, it is still possible to grow into 2019 as a long-term EPS CAGR as you indicated?

We don't give long-term earnings guidance so we do one year at a time. Long-term I am not talking year-to-year but long-term we believe we have good potential to grow and achieve our objective of being a top quartile total shareholder return, but year-to-year I wouldn't infer that.

So your top quartile is more on a long-term basis?

Absolutely. Which gets back to - I think the question Mike Weinstein asked a little bit as well.

Thank you. Since there are no further questions, I will now turn the presentation back over to David Emery for closing remarks.

All right, well thank you everyone for attending this morning. We appreciate your continued interest in Black Hills. We’re excited about the future. Like I said we’ve got some timing issues right now related to earnings and earnings growth but we’re very excited about our dividend increase, our strategic decision to exit oil and gas business, and our long-term capital spending prospects are even better than we previously thought. So that's a great issue for us. Those of you who are going to be at the EEI Financial Conference, we look forward to seeing you there. Have a great rest of your day.

Thank you for participation in today's conference. This concludes the presentation. You may now disconnect. Good day.