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

Thank you, Brian. Good morning, everyone. Welcome to Black Hills Corporation's Fourth Quarter and Full Year 2017 Earnings Conference Call. Our materials for the fourth quarter and full year 2017, including our earnings release and webcast presentation, can be found at our website at www.blackhillscorp.com. 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, Form 10-Q and other documents 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 this morning. For those of you following along on the webcast slides, we'll be starting on Slide 3. We'll follow a similar format to that of previous quarters. I'll give a quick update on the quarter and the highlights for both the quarter and the full year. I'll turn it over to Rich Kinzley, our Chief Financial Officer, to update financials. And then, I'll visit a little bit about strategic overview and forward plans. So moving on to Slide 5, fourth quarter highlights. For our utilities subsidiaries, on December 15, our Arkansas gas subsidiary filed a rate review with the Arkansas Public Service Commission seeking to increase annual revenues by approximately $30 million, with rates effective hopefully by the fourth quarter of 2018. On November 17, our Northwest Wyoming gas utility filed a rate review with the Wyoming Public Service Commission seeking to increase annual revenues by approximately $1.4 million, effective in the third quarter of 2018. Moving on to Slide 6, utility highlights, continuing those. On October 3, Rocky Mountain Natural Gas, which is our intrastate pipeline in Colorado, filed a rate review with the Colorado Public Utilities Commission seeking to increase revenues by approximately $2 million a year, effective in the third quarter of 2018. We're currently reviewing the impacts of tax reform related to all three of those active rate reviews, and we may need to amend our request, if needed. I will have a little more detail on that later. On August 4th, our Colorado Electric Utility received bids related to a request for proposals for an additional 60 megawatts of renewable energy resources to be in service by 2019. Those are required to meet Colorado's renewable energy requirements. The Colorado PUC approved the delay in…

All right. Thanks, Dave, and good morning. I'm going to jump right in on Slide 11. On Slide 11, we reconciled GAAP earnings to earnings from continuing operations as adjusted a non-GAAP measure. We do this to isolate special items and communicate earnings to better represent our ongoing performance. As shown on this slide, we now report our oil and gas segment as discontinued operations, given our ongoing exit of that business. We also experienced other special items not reflective of our ongoing performance in each of the last five quarters. The first 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 the vast majority of the integration work related to the acquisition in 2016 and finished the remaining items in 2017. The second special item relates to income taxes, and is predominantly the result of tax reform. The corporate tax rate changed from 35% to 21%, required a onetime revaluation of our deferred tax assets and liabilities, which resulted in a net reduction to income tax expense. I'll talk more about tax reform in a few minutes. These special items are not reflective of our ongoing performance. And accordingly, we reflect them on an as adjusted basis. As adjusted EPS for the fourth quarter was $0.98 per share compared to $1.06 per share in the fourth quarter last year. For the full year, as adjusted EPS increased over 7% in 2017 to $3.36 per share compared to $3.13 per share in 2016. This growth was driven mainly by a full year of earnings contribution from the SourceGas acquisition, which closed in mid-February, 2016. Slide 12 displays our fourth quarter revenue and operating income. Consolidated revenue and operating income were effectively flat comparing fourth quarter…

Thank you, Rich. Moving on to Slide 27. We group our strategic goals into 4 major categories, profitable growth, valued service, better every day and great workplace, with the overall objective of being an industry leader in all we do. On Slide 28, from a strategy execution perspective, we are focused on delivering strong long-term total shareholder returns. We plan to accomplish that by achieving long-term EPS growth rate above the utility industry average, targeting a 50% to 60% dividend payout ratio, while we retain the flexibility to increase the dividend more during periods of slower EPS growth and continuing our track record of 48 consecutive annual dividend increases. Slide 29, related to strategy execution, we are in a period where we're in the process of transitioning earnings growth drivers from an acquisition and integration focus back to a more traditional utility growth strategy. In the near term, we expect slower earnings growth, since we're entering test years in preparation for rate review filings or commencing filings in certain jurisdictions. As I noted earlier, we've already filed the request for 3 rate reviews during the fourth quarter. All are still pending. In the long term, we expect higher earnings growth, driven by strong capital investments to meet our customer needs, our continued focus on standardization and efficiency improvements and more regular rate review filings. On Slide 30, as we focus on delivering long-term shareholder value, our fuel and service territory diversity reduces our business risk and drives more predictable earnings. On Slide 31, our acquisition and rapid integration of SourceGas has been a great success, adding substantial value for both customers and shareholders now and well into the future. This slide demonstrates the significant G&A and O&M cost savings per customer from the successful integration of SourceGas into Black Hills.…

[Operator Instructions]. Our first question comes from the line of Julien Dumoulin from Bank of America.

Just wanted to follow-up on the tax reform stuff. Just want to be very clear. How are you seeing this impact your FFO to debt metrics? And what are the Agency saying thus far? I know you've all have talked about kind of 15%, 16% historically of -- what is the impacts of tax reform, particularly given sort of the upcoming filings that you all anticipate to make with the states? Are we to understand that basically you have fully reflected the impacts pending the clarity with the states? Or you kind of initially reflecting the lower cash flows in the updated '18 guidance? And then you're going to see how that moves from there?

Well, I can start out, Julien, this is Rich, with the credit rating agencies. And then Dave, I think, probably will address the situation with the state -- individual states. We've had communication with the rating agencies. We feel good about where we're at. There is some deterioration, obviously, in FFO to debt. But even with the impacts of tax reform, we still think we're probably going to be in the mid-teens on that FFO to debt, and it will improve as each year passes. So we feel good about where we're at. We'll continue our dialogue with the rating agencies. And Dave, you want to address the state issue?

Yes. And we have made assumptions that, obviously, we don't know the final details, but we made what we believed to be reasonable assumptions on impacts on our cash flows and incorporated those into our guidance for the year.

Okay. Everyone just to clarify there, so is it fair to say that you're effectively assuming some kind of modest deleveraging to address with the reduction in cash flows? Or maybe could you quantify that a little bit?

No, no. No, as I said in my comments, we don't expect to have to issue any equity to cover our CapEx and dividends, even in considering the -- $35 million to $45 million a year is our estimate, as Dave said, based on reasonable assumptions that we have at this point for the impact -- from tax reform on cash flows. Not enough to move things that we're going to have to issue equity.

Right. Just the slight change in the financing plan on the leverage?

Yes, we may have to borrow a little more money, obviously, as we go out, but it's not moving the needle enough that to concern us.

Got it. And how do -- what's the implication on the states kind of going back to that second question there?

Yes, like I said earlier, Julien, we're still working on specific discussions and what we would propose on each state. We've talked to all of them. We did it immediately after tax reform past and told them that it would be our intent to come in and try to provide benefits to customers as quickly as practical. As I said earlier, where we don't have active ongoing rate cases and rate review processes underway, our preference would be to use a rider mechanism in all states, because it gives the money back to customers much more quickly. If we were to try to go through full blown rate cases in those jurisdictions, you're looking at almost a year before customers realize any savings. But we don't think that's really the best approach. So again, subject to deciding state by state, many of those jurisdictions will likely go in and ask to pass the benefits through via an existing rider. The three states we've already filed rate cases in were reevaluating our request there and may adjust those depending on the finalization of those reviews. And we've been in dialogue with those commissions in those three circumstances as well.

Got it. But conceptually speaking, as you think about these filings, it shouldn't -- your expectations for earned ROEs, obviously, pending the outcome of these rate cases isn't necessary changing as a function of tax reform, if I'm hearing you?

Correct.

Our next question comes from the line of Michael Weinstein from Crédit Suisse.

Just a follow-up on Julien's questions. Is the -- are you proposing to pass back 100% of the tax benefits through the riders? Or is it just a portion of it? I mean, I know that this is probably early phase discussions with the regulators, but is there any more flavor you can add to that?

Well, essentially, the difference in the tax rate, the impacts. I mean, it's not as simple as just the change in tax rate, there's some changes in deductibility and some other things. But the net benefit of that largely would be passed on to customers. Now again, it depends on state-by-state analysis and where we are in regulatory proceedings and future planned proceedings in each of those states. On the nonutility side, obviously, we expect to retain those benefits.

Right. And considering that the Arkansas rate filing was your own choice, do you think the increases, or do you think the tax reforms increase the chances of a favorable outcome there? I mean, is this something that you can -- is this something in your back pocket so to speak as you go into negotiations there?

Well, the bottom line is anything that is a positive to customers is positive to the process, certainly. The difference in tax rate certainly would have an impact on our revenue request and we're analyzing that, discussing how and if to incorporate that into our filing, but we've had discussions with the commission staff there and we're working on that issue now.

Right. And just one last question. How have the tax reform impact to cash flows affected the plan to get down to the, I think, the low to mid-50s debt ratio by, I think, after 2019 or so?

Obviously, it impacts that. We still think we can get close to the mid-50s by the end of our kind of five-year planning horizon. But it impacts it by 100 to 200 basis points by the time you get out 5 years of cumulative compounding of that, right?

And our next question comes from the line of Chris Ellinghaus from Williams Capital.

Can I get a little clarification on what in guidance on a couple of issues? You said that -- I don't remember what the word was, but favorable outcomes in the pending rate cases. Can we assume that whatever you've assumed for the rate case outcomes is effective on those dates? You were talking about third quarter, fourth quarter?

Yes

Can we assume that you've assumed that the rate outcomes are somewhat below your ask in those cases?

Well, put it this way. Historically, it's pretty rare for utility to be granted its full rate request.

Okay. Also you mentioned normal weather in guidance. It looks like the early part of the first quarter might be a little bit below normal. Did you reflect that already in the guidance?

Yes. It's been a mixed bag on the weather front through January in our service territories. We're just getting the books closed obviously, so it's a little too early to tell exactly. But while we've had some cold come through, we've also had some warm spells. It looks like it's probably not impactful, I guess, compared to normal in January.

Okay. As far as the tax reform strategy for using riders and clauses, have you gotten much feedback thus far? And have you made any specific filings to-date?

We have not made any specific filings to-date. We've had preliminary discussions basically notifying the staffs, and this was immediately after the first of the year that hey, we want to work with you to get this done and really back to customers as quickly as practical. And so at least, mentioned the riders is perhaps the best mechanism to do that. But beyond that, we haven't gone any further yet, where we want to firm up numbers before we engage in real meaningful discussions with them.

Okay. One last quick one. The confusion about Wyoming Electric customer expansion from last year, have you gotten any greater clarity on those customers and timing?

I think you might have been talking about Colorado Electric. You're talking about a couple of the things we discussed in our guidance revision?

I'm talking about the potential customers that weren't realized last year as you expected.

Yes, that was largely in Colorado, and a little bit in the other territories. But yes, we've certainly worked pretty hard to get our hands around those forecasts.

And believe we have reasonable assumptions related to that baked into this year's guidance.

Our next question comes from the line of Insoo Kim from RBC Capital Markets.

In terms of, I guess, the number of rate cases that you may be filing in the next few years. If we see an uptick in rate case filings more near term, would that be mainly as a result of commissions requesting or requiring you to file due to tax reform? Following that, it would -- has any contingent it's interest to [indiscernible] -- want to file sooner than later?

Yes, I would say, the discussion we had at our analyst meeting, where we said we may be filing up to 10 cases in the next five years, that's still valid. It really hasn't changed materially. Again, we need to work our way through the process of tax reform. If we are successful in the approach that we would like to pursue, which is getting the benefits to customers as quickly as possible through rider mechanisms, it really shouldn't change our 8-K's schedule meaningfully.

Got it. Okay. And then, somewhat related to tax reform. Do you -- how much boost to rate base do you foresee as a result of that? And related to that are you -- do you -- are you still considering potentially providing a rate-base case or figure for the electric and gas utilities sometime in the future?

We've talked a lot about disclosing a little more detail around our forward utility capital spending plans, and we are working on that. I can't promise you when and if we'll deliver it, but we want to be very confident in it before we put it out.

And obviously, the way it's going to change how -- the tax reform is going to change the impact to rate base growth, it's obviously positive. It's going to take a while to work through that, because that the way that large deferred tax assets -- the deferred regulatory liability transferred from deferred tax assets, you have to go through every asset and a lot of detailed calculations. So it's just going to take a little way while for that to play out into.

Well, and certainly, then there's a bonus depreciation going forward, so that's additive as well.

Yes, exactly. I'm sorry, just one more. How much parent debt are you assuming that maybe hit as a result of the lower tax shield?

Well, it's about $500 million, roughly. $500 million to $600 million.

Our next question comes from the line of Christopher Turnure from JPMorgan.

I just wanted to get more color on the reallocation of E&P expenses. I know you've given us a message before about, I think, half of the debt income from that or that drag from that segment being reallocated, but can you give us a more precise dollar amount now that it's out? And also can we look at the actual reported 2017 segmented O&M as already reflecting a full year of that now?

Yes, I think, if you look in the press release, the back part of the press release where we give our segment information, you're going to find that information, Chris. We, basically, in 2017, we did that reallocation, if you will, the costs that were in E&P are now in our gas and electric utilities and to a lesser extent, our other 2 business units. We did not go back prior to 2017 and apply that because they won't match our FERC filings and so forth from those years.

Okay. But in terms of the numbers that you presented to us today, 2017 is a clean starting point?

You'll find them in the press release.

Yes, '17 is clean corporate allocations for the subsidiaries other than these coops which obviously we removed it.

Correct.

Okay. And then going back to the Arkansas rate case, it's a pretty big number. As you mentioned, it does not include a benefit from tax reform yet. What are kind of the main drivers of that ask capital O&M sales volume, et cetera?

Yes, the one single issue there was, we spent $160 million in that territory since we bought it. The growth there has been fantastic. So that's a big piece of it. We actually need and are requesting additional labor resources to keep up with the growth there. Those are really the bigger drivers, then obviously, cost inflation and all the other pieces that typically make up our rate case request.

Okay. So it sounds like a combination of capital and operating expenses more so than sales volumes?

They are largely driven by growth and trying to keep up with the growth in the area, which I think is a positive.

At this time, there are no questions in the queue. [Operator Instructions]. And our next question comes from the line of Julien Dumoulin from Bank of America.

Just following up, can you break down a little bit the tax -- well, the change in guidance between tax reform and short-term interest? What was what? And then also, to the extent which you have a tax reform EPS impact expectation for '18, can you break that down a little bit more? I imagine the bulk of that, obviously, is the holdco offset as you said in your remarks by the unregulated businesses, but just wanted to clarify if there was any flow through on any of those unregulated businesses?

No, I don't -- no, we'll provide more detail there. I mean, we moved it down $0.05. It's a combination of interest expense and impact of tax reform, both of which were fairly minor. But we felt enough that we should move down a $0.05 on each end of the range.

Got it. But just to be clear about this, with respect to your forecasting in Nebraska and other states, that's still fairly on track versus what you guys had contemplated perhaps quarter-over-quarter?

Yes.

Yes.

And I'm seeing no further questions. I will now like to turn the call back to David Emery for closing remarks.

All right. Thank you. Thanks, everyone, for attending the call today and listening in. We appreciate your continued support. Have a great rest of your day.