Good day, ladies and gentlemen, and welcome to the Black Hills Corporation Second Quarter 2018 Earnings Conference Call. My name is Daniel, 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. David Soderquist, Investor Relations Analyst of Black Hills Corporation. Please proceed, sir.

Thank you, Daniel. Good morning, everyone. Welcome to Black Hills Corporation’s Second Quarter 2018 Earnings Conference Call. 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’ll now turn the call over to David Emery.

Thank you, Dave. Good morning, everyone. Thanks for attending our call this morning. For those of you following along on the webcast slide presentation, I’ll be starting on Slide 3. Today, we’ll follow a similar format, as we have in previous quarters. I’ll give a review of the second quarter, some highlights from the quarter. Rich Kinzley, our CFO, will give the financial update. And then I’ll discuss forward strategy, followed at the end by questions. Moving on to Slide 5, second quarter highlights. Starting with the utilities. Most of these highlights occurred during the quarter, but I will also mention a few that occurred during the month of July as well. On July 25, our South Dakota Electric subsidiary placed into service the first 48-mile segment of a planned $70 million 175-mile transmission line that will run from Rapid City, South Dakota to Stegall, Nebraska. The remaining segment of that line will be in service by the end of next year. On July 16, our Northwest Wyoming Gas subsidiary received approval of a rate review that had been in process. Those new rates will take effect September 1. And then early in July and in late June, we set new all-time peak loads for both of our Wyoming Electric and Colorado Electric subsidiaries. Moving on to Slide 6, continuing with the utilities highlights. On June 1, Rocky Mountain Natural Gas, which is our intrastate gas pipeline in Colorado, implemented new rates following the settlement of its rate review process. In mid-May, our Wyoming Gas subsidiary filed with the Wyoming Public Service Commission for a certificate of public convenience and necessity. We plan to construct the new $54 million, 35-mile pipeline in Central Wyoming outside of CASPER. That line will provide additional sources of natural gas supply, increased capacity into…

Very good. Thanks, Dave, and good morning, everyone. We did enjoy a solid second quarter earning $0.45 of EPS this year compared to $0.42 for the same quarter last year. And as Dave noted on the last slide, our electric utilities drove the improvement year-over-year. I’ll jump in on Slide 11, where we reconciled GAAP earnings to earnings, as adjusted, to non-GAAP measure. We do this to isolate special items and communicate earnings that better represent our ongoing performance. This slide displays the last five quarters and trailing 12 months as of June 30, 2018. As you can see, we did not have any adjustments this quarter. We did experience special items not reflective of our ongoing performance in each of the past four quarters. And as I reported in prior quarters, the first special item related to a one-time acquisition cost incurred as part of the SourceGas acquisition and integration. The remaining special items relate to income tax matters, including tax reform and the tax benefit of illegal restructuring effectuated in Q1 2018. These items were not indicative of our ongoing performance and, accordingly, we reflected them on an as adjusted basis. Again, our second quarter as adjusted EPS was $0.45 compared to $0.42 for the second quarter last year. At the bottom of the slide, you’ll see our EPS performance of $3.58 for the trailing 12 months, which represents 6% growth over $3.39 for the same period in the prior year. Turning to Slide 12. Slide 12 illustrates major drivers bridging the differences from Q2 2017 to Q2 2018. All amounts on this chart are net of taxes. You’ll note weather was a positive driver year-over-year at both gas and electric utilities, where we achieved margin growth despite recording revenue reserves in Q2 2018 related to passing tax…

Thank you, Rich. Continuing on with the forward strategy, I’ll start on Slide 23. Consistent with what we’ve done for the past several years, we grouped our strategic goals into four major categories, profitable growth, valued service, better every day and great workplace, and with the overall objective being an industry leader in all we do. On Slide 24, from a strategy execution perspective, we’re focused on delivering strong long-term total shareholder returns. We plan to accomplish that by achieving a long-term EPS growth rate above the utility industry average, targeting a 50% to 60% dividend payout ratio, while retaining the flexibility to increase the dividend during periods of slower EPS growth, and continuing our track record of 48 consecutive annual dividend increases. On Slide 25, we’re currently in the process of transitioning our earnings growth drivers from an acquisition and integration focus, post the acquisition of SourceGas, now back to a more traditional utility strategy. In 2018 and 2019, we expect slower earnings growth as we’re entering test years, preparing for rate review filings. We’re commencing those rate review filings in certain jurisdictions. And as I already mentioned, we have a couple that are ongoing or completed a couple and have one that’s ongoing currently. Over the longer term, 2020 and beyond, we expect higher earnings growth, driven by strong capital investments to meet our customer needs, continued focus on standardization and efficiency improvements and more regular and frequent rate review filings. On Slide 26, as we focus on delivering strong long-term shareholder returns, our fuel and service territory diversity reduce our business risk and drive more predictable earnings. On Slide 27, our utility acquisitions over the years have created a much larger transmission and distribution system, both on the electric and the gas side. With that increase in…

[Operator Instructions)] Our first question comes from Michael Weinstein with Credit Suisse. Your line is now open.

So the – you’re going to file for the reconciliation filing first in Colorado soon. And then after that, you’ll file for a rate case for the combined entity once it’s completed. Do you have any kind of like indication of timing between those four different filings, and when we can expect the full filing?

Well, we would hope to – the first filing is basically to consolidate the two legal entities. And once that’s approved, which hopefully will be a relatively straightforward process, we would hope to file the combined rate review request in the fourth quarter of this year.

Got you. Separate question. On Page 51, you note that the Wygen I plant has a purchase option that goes to 2019. And I’m wondering, is there anything you could tell us about the resource planning process in Wyoming currently? And what kind of considerations are being given for this plant to possibly be a rate base at some point?

Yes. We’re in the process of working on our Electric Resource Plan for our Wyoming Electric utility right now. We would expect to kind of wrap up that process close to year-end. And hopefully, included in that will be a recommendation related to Wygen I, whether we would extend that contract or whether we would seek to rate-base it. Those things will all be included in that resource plan.

Is there – what other kinds of considerations might go into that? Would you have to have a competitive RFP attached to that?

Yes, it’s possible. It really depends. I think that’s an extremely economical resource. It’s a great baseload resource. It’s been part of Cheyenne’s portfolio since it came online in early 2003, very – meets a very critical need for them. If we were to transfer it from IPP, if you will, to a rate-based asset that would likely require some approval by FERC and other things, we’ll probably need at least a market comparison there. But we’re still in the process of evaluating that whole process of what it would take, but likely would have to do some kind of a market comparison with the competitiveness of the resource.

Okay thank you very much.

Thank you. And our next question comes from Julien Dumoulin-Smith with Bank of America Merrill Lynch. Your line is now open.

Good morning can you hear me? So just following up on some of the comments you just made. Just want to

Good morning Julien.

So just following up on some of the comments you just made. Just want to elaborate a little bit on additional equity. Obviously, you have the process of Wyoming from a generation perspective ongoing. Is it basically outside of the time line for frac wage just as your balance sheet either sort of – you see improving cash flows? Or would that apply here per your prior comment?

Yes. We have to see what the ERP shows us when we get that filed and done, Julien. We know have other large projects. We’re working on two. Certainly, the addition of $125 million to CapEx this year between the Colorado IPP project and the Natural Bridge has kind of pushed us to the point where we have to – for future major capital additions, we’re likely going to have to sprinkle some equity in to help fund those. But as I said earlier with our currently disclosed CapEx.

Got it. All right. Excellent. And then just following up here. For 2019, I know it’s a little early, but just wanted to understand the factors in the second half of the year here. You talked about an outage presumably. Can you elaborate on what the impact is on earnings in 2H 2018? And also to the extent to which we’ll roll forward on 2019, obviously, we’ve got the dilutive impacts, anything else we should be considering to keep in mind as you roll forward there?

I don’t think there’s anything to really keep in mind, Julien. I think, basically, we talked about the couple of things that are planned for the second half of the year, basically is the reason why we’re leaving guidance on where it is, even though we’re off to a pretty good start for the year. We do have a planned outage at Wygen I and a couple other O&M projects that will likely be slight negatives in the second half. So we’re maintaining our guidance level where it is. Plus, we’re early in the summer cooling season until we get through July and August and early September in particular, never know how electric loads will develop. So that’s critical. But basically, we’ve decided to maintain our guidance where it is for those factors. But 2019, as Rich said, with the dilution of the equity units, we’ve been talking about this for over a year now, we’re going to have to drill 7% or 8%, which is a pretty hefty clip to maintain 2019 in line with our currently disclosed guidance for 2018. But that’s not new news. I mean, we’ve been talking about that for a while.

Excellent. Yes. No, absolutely. Can I turn back to the Arkansas Gas? Just noticing low revenue – lower revenue requirement or revenue number in the slides. Just what is that related to, the 30 going to the 2018? If I can follow up there. And then separately, maybe just on the regulatory front. Can you comment a little bit on thoughts on equity ratios across your jurisdictions, especially Colorado, you see to make that filing later this year on a consolidated basis?

Well, in Arkansas, that’s predominately tax reform, Julien, because the initial filing was before we did it in early December, ahead of tax reform. So it’s nearly all tax reform. On the capitalization ratios, each quarter, we’re looking at all our subsidiaries and capitalizing appropriately. I don’t know what beyond that you have for question there.

Well, as I said, I was thinking. A lot of your peers have been filing for higher equity ratios across their jurisdictions as they go back in and, obviously, to the extent to which you’re collapsing these utilities that the capital structure itself might be somewhat evolving as well. So I figured just asking on the equity ratio, specific to Colorado in this instance.

I mean, in general, we finance each individual utility separately within our company notes, independent of the consolidated capitalization. We generally try to maintain between a 50% and 54% equity ratio at our utilities. And I don’t think we have any goal of radically ratcheting that up, for example, but we’d like to maintain in that ratio. Obviously, a little bit on the higher end is good. We think that’s a prudent way to capitalize those utilities, and we will continue to do so.

Sorry. And one quick cleanup from the last question from Mike. Just in Wyoming on the process, how does the PCA figure into the map around potentially bringing Wygen into the fold?

Yes. I think if you look at the Wygen I contract today, part of that process of going through the resource plan and making the decision, whether you recontact or extend the contract or rate base is a comparison between the contract price and what the cost would be to customers under rate basing. That contract was entered into way back in like 2001, and then amended several years ago. It’s got a relatively decent price to it. Would probably be better long term for customers to have a rate-based asset, but that’s part of the process we’re going through now to determine that with certainty prior to making a decision on resource plan recommendations.

Excellent David thank you very much.

Thanks.

And our next question comes from Lasan Johong with Auvila Research Consulting. Your line is now open.

David, the consolidation of the gas utility is a great idea, but you didn’t mention whether would cost do all that – I mean, what kind of savings will achieve?

We haven’t specifically talked about it, Lasan, as far as the savings. I think a lot of it’s going to be ongoing O&M savings and ongoing filing savings, make it a lot of simpler for customer service, for example, where we have multiple pairs in the same states. The regulators on their side, obviously, a lot less rate cases, less regulatory filings, routine filings and otherwise. We’re trying to do to – change the timing or plan the timing, such that it’s not a special standalone process. So when we need a rate review in that state anyway, we’re going to go through the process of consolidating. So we’re hopeful that by doing it, when we need a rate review anyway, we’ll reduce the amount of incremental cost of actually consolidating the entity. Might be a little more testimony, a little more completed rate case, but in general, shouldn’t add significantly to the expense of going through the process.

Great. Is this pertaining to creating one utility, gas utility for the whole Black Hills complex? Or are you going to keep them state separately?

By state.

So you’re going to keep it by state separately? So there’s no consolidation beyond the – within the inside of the state?

That’s one of the advantages I think we have, Lasan, as we really only have one entity that crosses state lines from an ownership standpoint. So it makes the regulatory process a lot simpler. We’re not the fighting between jurisdictions on expectations for regulators, et cetera. Each state would be set up as a separate gas LDC. Now it’s set up that way. We just got multiple LDCs in three of those states. But it’s a lot more straightforward from a regulatory perspective, and a lot easier to manage. And frankly, it helps mitigate business risk.

I Yes, that make sense, perfect sense. Just a couple of administration stuff. Peak load, do you guys existentially assist the problems, particularly from wind?

No. The peaks went fine. As it usually occurs for us when we set a new peak load, either winter or summer, we usually get very little contribution from our renewable resources. They weren’t zero – they weren’t zero this time, but they certainly weren’t at capacity either. Generally, when we have real hot days or real cold days in our part of the world, that has a tendency to be quite still. So we have plenty of other resources to fill in the gap on those days.

And lastly, just general overall question. U.S. economy seems to be accelerating. Do you see any kind of demographic changes, either service territories for the better or for worse? I have seen for the better, if anything.

I don’t think so, no. I would say, overall trends, service territory is pretty stable. We have good growth going on. But in some of our territories, China and Wyoming has been growing strong, Colorado Gas in particular is growing very well, kind of slow and steady in South Dakota, but no major shifts in demographics, politics, et cetera. I would say it’s kind of status quo, the way they have been for the last years. So it’s pretty consistent.

That’s great. Thank you very much,

[Operator Instructions] Our next question comes from Andrew Weisel with Scotia Howard Weil. Your line is now open.

Thank you, good morning guys. First question is a few small moving parts in the CapEx plan for 2018 to 2019. I’m looking at pages 28 and 44 in the slides. So you were pretty clear that the overall increase of about $50 million in 2019 related to the gas pipeline. I understand that. It looks like you added around $12 million of Mining CapEx this year, and pulled about $19 million of CapEx at Power Generation from 2019 to 2018. Sorry if I missed it, but what explains those two deltas?

Well, the $12 million on the call is we bought a new shovel that’s going to help us be more productive in the future. It was a good opportunity, so we jumped on it. That will be in service by the end of the year. And then the acceleration on the Power Gen is related to the Peak View Wind or the Busch Ranch II wind farm that we announced earlier this year. We’re going to more of that done this year. So we’re just pulling it forward from next year into this year.

That makes sense. Okay. next question is on the jurisdiction simplification update. You’ve previously talked about ballpark of average of two rate cases per year. If all of these consolidations go forward, how should we think about an approximate pace of filings for the larger combined entities?

It’s really driven by spending levels and investments in those territories. We’re doing everything we can to try to control the O&M side of the equation. So the rate case timing by state will be driven by the growth and spending required in those states. So it’s really hard to make a generalized statement. Certainly, as we consolidate entities, we’ll reduce the number of rate cases. We said with the current number of entities we have, we’re probably looking at running two or three rate cases a year. As we keep consolidating those entities over the next, say, three years or so, it will reduce the number of rate cases. The timing, again, is going to be dependent on growth in each individual territories, some maybe 4, 5, 6 years in between, some maybe as close as 2 or 3. States like Arkansas, for example, we bought it two years ago, and we already spent $160 million on the system there, and needed to file a rate case. So it’s really going to be dependent on the level of investment required to keep up with customer demand in those states.

That makes a lot of sense. And then lastly, if you’re able to comment, we see some media reports about Pueblo having a meeting next week to discuss potential meetings utilization. Any high-level thoughts on maybe your interest in divesting, your ability to prevent that? Or any similarities or differences versus some other instances of similar decisions from Colorado cities?

Yes. We’ve been in active dialogue with the city of Pueblo. Our local leader there has spent a lot of time visiting with them about that. Our personal – our opinion, as a company, is that we really don’t have any interest to divest. We’re a utility company. We buy utility assets to grow as a utility company. The size of our current asset base helps keep cost low for all of our customers through shared services, et cetera. So it really makes no sense for us to divest a utility. We did respond to – I wouldn’t really call it a formal offer, but we got an inquiry from the local co-op there. I think in interest of trying to serve the city in our stead, it was woefully inadequate, and we responded and actually made the decision to publish that response letter in an 8-K. I think that pretty clearly lays out our position on interest in selling the business. We believe that we’re doing a good job managing the city’s electric supply. Circumstances required us to build a lot of generation in a short period of time. That is behind us. And so now we have the luxury of a little bit more stable rates with that capital investment already being made. We have the most modern fleet and cleanest fleet in the state, all renewables and gas-fired. It’s all new highly efficient, fuel-efficient and everything else. So we feel pretty confident that although our rates are relatively high – they’re not the highest in the area, but they’re relatively high in Pueblo, that the surrounding utilities will be catching to us as they modernize their generation fleets over the next several years, as we’ve already done. And they have to comply with the renewable standards and continue to deal with CO2 regulations, et cetera. So we feel pretty good about where we’re at there. We’re making good positive progress. It’s going to be a slow process. We take seriously the municipalization discussions in Pueblo, and we’re engaged in those discussions and we’ll continue to be. But our plan is to continue business as usual. If you want to look in an example of an attempted municipalization in Colorado, I think you could look at the highway at Boulder and see how long that’s been going on. And I think it’ll give you at least a relative sense of what it takes to actually accomplish that, which is basically how we kind of look at it.

Alright, appreciate all the time Emery.

Thank you. And I’m not showing any further questions at this time. I would now like to turn the call back over to David Emery for any closing remarks.

Well, thank you all for attending our second quarter call today. We very much appreciate your attendance on the call and your interest in Black Hills. Have a great rest of your day.

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