Good day, ladies and gentlemen, and welcome to Black Hills Corporation Third Quarter 2018 Earnings Conference Call. My name is Brian and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I'd now like to turn the presentation over to Mr. Jerome Nichols, Director of Investor Relations of Black Hills Corporation. Please proceed, sir.

Welcome to Black Hills Corporation's third quarter 2018 earnings conference call. Before we begin today, I would like to note that Black Hills will be attending the EEI Financial Conference, starting November 11th in San Francisco. The company will host one-on-one meetings throughout the conference and deliver presentation to investors on Tuesday, November 13. Our presentation materials and webcast information will be posted on our website at www.blackhillscorp.com under the Investor Relations heading after market close this Friday. Leading our quarterly earnings discussion today are David Emery, Chairman and Chief Executive Officer; Lynn Evans, President and Chief Operating 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, Jerome. Good morning, everyone. Thanks for joining us. Before I jump in on the webcast deck, I've got a couple comments. Last week, I announced that after almost 15 years as the CEO, 14 of those as Chairman and CEO, that I plan to retire as CEO of the company effective December 31st. To help ensure a smooth transition following my retirement as CEO, I'll continue to serve as an employee of the company in the role of Executive Chairman of the Board until May 01, 2020, which is through the end of my current board term, which will end at our Annual Meeting of Shareholders in late April of 2020. Consistent with our long-standing and real comprehensive succession planning process, Lynn Evans, our current President and COO was appointed to succeed me as Chief Executive Officer, effective January 1st. Lynn was also appointed to the Board of Directors effective November 1st. I'm really confident that now is the right time to transition the company to a new CEO. We've completed the divestiture of our oil and gas subsidiary, which is our final non-utility-related business. Now, as an electric and natural gas utility with 1.25 million customers and 800 communities and eight states, we have an excellent strategic plan in place to help ensure success for years to come. Lynn is absolutely the right person to lead Black Hills into the future. During his 17 years with Black Hills, he has played a key leadership role in the transformation and growth of the company. He will also guide an experienced officer team, most of whom have also been a key part of the company's past success over the years. I look forward to helping ensure a successful and seamless transition and to assisting Lynn and the leadership team…

All right, thanks Dave, and good morning, everyone. Financial results for the third quarter did meet our expectations, considering that in the third quarter we had unfavorable weather impacts on margins compared to last year and we recorded revenue credits associated with the settlement at Wyoming Electric that Dave mentioned. I'll get into more detail on these items on the following slides, but in short, these items explain the majority of the difference between the third quarter last year and the third quarter of this year. I'll start on Slide 11, where we reconcile GAAP earnings to earnings as adjusted a 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 September 30, 2018. Looking from top to bottom on the slide, the first special item related to one-time acquisition costs incurred as part of the SourceGas acquisition and integration, which was wrapped up at the end of 2017. The second item relates to tax reform. At the end of 2017, we recorded a benefit related to tax reform and in the first and third quarters of this year, we recorded expenses associated with the new law. The expenses this year relate to our continued evaluation of the impact of the new law on our financial statements as well as impacts from continued revisions to the law. For example, in the third quarter, the IRS posted changes related to bonus depreciation, which resulted in recognition of additional expense. The third item you see related to the tax benefit of a legal restructuring effectuated in Q1 2018. These items were not indicative of our ongoing performance and accordingly, we reflected them on an as-adjusted basis. Our third quarter EPS was…

Thank you, Rich. Good morning, everyone. Please allow me to start by saying congratulations to David. He's been an incredible leader and a mentor to me as well as the entire leadership team and our employee team. During Dave's tenure as our CEO, he led the re-molding of our organization into what it is today. When David became our CEO in 2004, we have fewer than 900 employees. We're nearly 2,800 employees today. Also our assets have grown from $2.1 billion to $6.7 billion and our market cap has grown from approximately $900 million to nearly $3.7 billion. Those are some outstanding accomplishments and we appreciate Dave. We're really looking forward to his ongoing guidance and inspiration as he becomes our Executive Chairman. For me, it's been a great privilege to work for Black Hills for more than 17 years now. I've reported directly to David for 15 of those years, and I guess that's enough for anyone. So David deserves retirement for that alone. I've also been fortunate to be at the senior management table for the past 14 years. As such, I believe strongly in our utility-focus strategy. We'll build upon as we focus on growth and delivering industry-leading customer service and reliability. We'll do that in the safest and most efficient manner possible. I'm particularly excited to continuing outstanding partnership with the company's very experienced leadership team, all of whom have played key roles in the company's success and will play key roles in our company's future success. And also I'm looking forward to the opportunity to work closely with our value stakeholders; of course, our customers, our investors and analysts, our regulators and our many other partners as we execute our utility oriented strategic plan. With that, now I'll start with slide 22 in the deck.…

[Operator Instructions] And our first question will come from the line of Julien Dumoulin-Smith with Bank of America Merrill Lynch. Your line is now open.

Hey, good morning.

Good morning, Julien.

Hey congratulations to both of you. It's been a pleasure and I look forward to it. Perhaps just to kick off the questions here, impressive shift here in the minimal lag bucket. Can you talk a little bit about the riders? It looks like there is a couple hundred million increase in total bucketed towards that minimal lag across your different gas utilities. And then maybe let me also lay it out, I'm curious on the Wyoming Electric strategy given the uptick in CapEx there, contrasted against the rate case stay out to 21 at this point.

Talking about your minimal lag Julien, yes, we have increased that capital spending, that goes through our long-term programmatic spending that we're working with our regulators on and with our teams to ensure we have a safe system going forward. As their system ages and as we replace certain parts of our pipeline, we're very focused on that opportunity to invest in that particular area. I didn't catch the last part.

What's the recovery plan given the stay out?

Well we'll be obviously likely to file a case there in mid-2021 as required by the stipulation. So it's all setting up toward that. Yeah and obviously we didn't break down when that capital will be spent Julien, somewhere in that five-year timeframe. But certainly we're cognizant of when the next rate review will be scheduled and heavy spending there related to growth today and then some of them more reliability-type spending probably occur a little bit later a little closer in timing to the rate review, but trying to spread that work out as we can.

Sorry, let me come back to the minimal lag just to clarify a little bit. Are there new mechanisms, are you shifting capital to different jurisdictions to ensure minimal lag? What drove such a meaningful increase? I am just making sure I didn't miss something on the regulatory front or if there's a shift and where you're spending?

Well, Julien, in Kansas, for example, we have the opportunity to essentially double our spending in Kansas due to legislation that was passed there. So that's part of it and then on Nebraska, we had the SSIR was extended for another year as well; so those two states. So we still continue to invest in and the rest of it is, yes, focusing on their programmatic plan. So no new riders in those particular states, but continued focused on the programmatic spending in those states.

If you recall in the previous couple of quarters, we've talked about working with our various states to at least inform them of our long-term plans for a more programmatic approach to routine line replacement for some of our older materials and things like that. We've had the opportunity to have some business with commissions and staffs and at least outline our preliminary plans. Those aren't something that we get a pre-approval for, but we wanted to make sure they were aware of what those plans where before we really announced the change in spending focus, that really deal with some of those issues, particularly some of the older materials as they age, want to make sure we're way ahead of those from a safety perspective. Now that we've had those conversations obviously, that was a big driver of the additional couple hundred million in spending.

One thing to add to that, the minimal lag as we define it, isn't just riders, obviously. It's capital that's spent that then leads into a rate review, Julian.

Just a quick - just to clarify what FFO-to-debt are you saw before with the new ATM, just where does that put you in the metrics? I know you've had some changes on your metric themselves.

Yeah obviously, we want to stay in the mid-teens and as we work through this plan period, we're headed toward the upper teens, Julian.

Got it. All right. Excellent. I'll leave it there. Thank you all and best of luck again.

Thank you, Julien.

Thank you. And our next question will come from the line of Michael Weinstein with Credit Suisse. Your line is now open.

Hi, congratulations, Dave and Lin, both of you. Hey, David, just curious, are you - do you have any other plans to move on to something else at this point or is this really a true retirement situation?

No, I don't have any other plans. My plans are really to play more and work less. So I think the transition here with the Executive Chair role is kind of a good way to ensure that, that happens. But I'm - after 15 years in a row, which is a long time, relative to the tenure of most public company CEOs, it seems like it's time to focus more on fun and a little less on work after a lot of years of working very, very full time. So, no other particular plans other than to enjoy and play.

It sounds like a good plan. Hey, on the new slides 30 and 31, that's the recurring CapEx and that's not intended to be the full amount of CapEx that has represented on slide 27. Is that - is there - can you quantify that as a percentage of the usual full amount for each year?

Well, those two new slides really are just for 2023 and beyond. We have the detailed for '18 through '22 on the two earlier slides and then the '23 and beyond, the numbers Lin referenced, the $225 million to $250 million for gas and $120 million to $140 million for electric, that does not include any major items. That's just the ongoing spend to keep up the reliability and safety of the system. But I think what it indicates is, we've got a really strong investment program just to keep up with the massive system that we have going forward. And there's a lot of upside opportunity on top of that for those major pipeline projects, power generation, renewables, et cetera.

And do you still expect to have like one or two of those year, roughly the $50 million range each kind of thing?

Yeah, we're working on a lot of them. It's just - it's hard to control the timing sometimes on those, but if you look back over history, we've had several almost every year. We've always got a bunch of them that we're working on and just the appropriate timing and when they are needed and some of those things, but our intent is to always have quite a few of those irons in the fire at any given point in time.

One last question on the Wyoming settlement, how does this affect and sorry, if I just missed this, but how does this affect the Wygen I consideration for rate base, possible rate basing at some point?

Well, our intent is to file our integrated resource plan by the end of the year and that should clear that up, I guess.

Yeah, it doesn't affect our opinion related to that asset at all. Really all it does is just clean up the remaining contract period. We had a dispute with some of the industrial intervenors about the way the escalation clauses work and then there were some other issues related to couple of years of prior PCAs that were in dispute. So it really just cleans all that up and basically ensures that we're not going to fight over for the remaining life of the contract. Hopefully, we resolve the issue through our resource planning process, well in advance of the expiration of the contract. We'll see how that process plays out, but as Rich said, we should file it before the end of the year.

Can you briefly identify like just how much EPS is coming from that one contract, like how much would be - how would this affect finances if it was not rate base and the contract simply expired?

Well, we haven't disclosed specifically what that contract provides in terms of EPS, Mike. But I think the way you can think of it is for the next through the end of 2022, it's escalating at 3%. So that contribution will continue and then, as Dave mentioned, we'll see how the IRP process plays out.

Yeah, there's only two assets and - there's only two assets in our Power Gen Business; this and the Colorado plant and we show that adjustment for the other 50% of that Colorado IPP plant. So you can deduce how much that Colorado IPP is of total power Gen earnings. If you were to look at back into what Wygen - the one thing we're pretty comfortable with though is the value of Wygen I for the customers of Cheyenne like. Whether that's a rate base contracting or whatever, that's an extremely low cost, very high availability resource. So, the likelihood of that plant not running is extraordinarily low. It's a fantastic resource for the long term and we're pretty confident in that. We just have to work our way through their process.

Okay, thank you.

Thank you. [Operator Instructions] Our next question will come from the line of Chris Ellinghaus with Williams Capital. Your line is now open.

Hey, guys. How are you?

Hey, good morning, Chris.

Congratulations to the jobs switchers.

Thank you.

Thank you.

Rich, the Wyoming credit, should we expect A; that that will be roughly evenly spread over the multiple years and would you expect to accrue that in the same quarter each year?

No, and here's the detail on that, Chris. We had reserves booked prior to this quarter of about $2 million associated with that. We reached the settlement in the third quarter. We actually recorded about $3.1 million pretax, which was predominantly the revenue credits we talked about in our comments and then there were a few other smaller items and then in the fourth quarter, we will record another $1.5 million associated with that and then $0.5 million each in 2019 and 2020.

The Busch Ranch I acquisition, how should we think about returns on that?

Yeah, I think you can kind of think of them as maybe slightly better than utility. It was a PPA contract basically that we bought out. So -

Most of it's going to come through the tax credits. That's right.

And with this increased CapEx and with the sort of slipping of the balance sheet with the unit conversion, have you got a target for what you you'd like the balance sheet to look like going forward?

Yeah. We want to get where our debt to total caps somewhere in the mid-50s, but that's not going to happen right away, given the strong CapEx program that we've disclosed. Obviously, we're sprinkling a little bit of equity in now, given the increased CapEx to help with that balance sheet rightsizing, if you will. But by the end of the five years, we'd like to be back to the mid-50s. We'll work our way there kind of, I wouldn't say linearly, given the large CapEx in 2019, but we'll work our way there over the next few years.

Okay, great, thanks for the details guys.

Thanks, Chris.

Thank you. And our next question will come from the line of Vedula Murti with Avon Capital. Your line is now open.

Hi, good morning, guys.

Good morning, Vedula.

And congratulations on your retirement and your plans to have fun.

Yeah. Thank you.

I'm wondering, following up on Mike Weinstein's question; right now, what is on the balance sheet? What is the carrying value of Wygen I?

I don't know the exact number off the top of my head, but it's in our 10-K that we filed in February and obviously, there will be a little depreciation off that net book value right now. We can look that up here, but -

Yeah, it's actually still down in the K.

It is, yeah.

Just wondering, do you have a number approximately, I can look at up obviously if I have to, but...

We'll find it here and answer here shortly.

Okay. And I guess then, where I'm going with this then is right now with the power sales contract, the power sales contract provide a utility type rate of return or is it kind of a below utility type rate of return that will by the end of the contract puts you even utility type rate return. Can you kind of describe that?

It provides a pretty good return. That contract was entered into clear back in 2002 I think, we started in 2003 with that plant and it's escalated and things along that period. The trends are pretty solid, I'd say at or probably a little above utility returns as you would expect from an IPP project.

And you can follow up with me offline or if you find that number, while we're still having this call I'd appreciate. Thank you very much.

We can answer that question. The K just indicates the net book value of Wygen 1 at December 31, 2017, was $69 million. So there's little depreciation off of that for nine months.

Thank you. And our next question will come from the line of Andrew Weisel with Scotia.

Hey, guys. I also want to pass congratulations to everyone and for all the positive regulatory updates recently, been a busy stretch for you guys. Just have two quick ones here. First on the dividend, obviously, you increased it recently, a little over 6%. You got the comment targeting 50% to 60%. Just want to be sure, how do you think about the other comment in the slides about increasing the dividend during periods of slower EPS growth? Does that imply that maybe we'll see a deceleration in the dividend growth as the EPS start to accelerate or maybe just kind of thoughts on the trajectory there.

Well, obviously we're not going to comment on what the Board might do with future dividends, but our intent is to not decrease the level of increase as you look up forward. We've increased it $0.12 each over the last two years and $0.10 the year prior to that. One change we made is to typically do it now this time of year as opposed to after the first of the year. Again, we'll see what conversations with the Board on that next year, but the intent would be not to decrease the level of increase.

Then just maybe just a little technical one, but the Nebraska safety and integrity rider, that is now going through the end of 2020, if I understood it correctly, it only covers historical spending. So how would recovery for spending from 2018 through 2020 be recovered? Would that be through a rate case and does that fold into the consolidation, or is that a separate issue altogether.

The short answer to that question is yes. It's primarily covered through rate cases. And then on intent and I think this has been outlined previously is we'll file for the consolidation cases when the entities combined would need a rate review. So, that's what happens when we talked about the rider extension basically puts us out into that 2020 timeframe, maybe late '19 timeframes to start the process and so any capital spending between now and then that is not covered by the rider or is not growth related and pays for itself as we go, then will be rolled into that consolidation rate case down the road. We do have two entities there and that rider extension only covers the former source gas territory. So we have some other mechanisms in place for our legacy Nebraska gas utility also.

There are no further questions. David Emery, please proceed to closing remarks.

We certainly appreciate everyone's time and attention today. As I said at the beginning, I think we had a great quarter and Andrew, just mentioned it, but our regulatory success has been really good. We've got an excellent team, puts a lot of time and effort in with our regulators to make sure we achieve great regulatory results. It's truly one of our core strengths and something that we look forward to continuing to execute on going forward. We've got a lot of activity coming up. We expect to do an excellent job on those regulatory filings, just like we have these that we've achieved recently. With that, that's kind of the end of our comments for today. Thanks a lot for your time and attention and your interest in Black Hills. Have a great rest of your day. Thank you.

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