Good day, ladies and gentlemen and welcome to the Black Hills Corporation First Quarter 2019 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 first quarter 2019 earnings conference call. Leading our quarterly earnings discussion today are Linn Evans, President and Chief Executive Officer and Rich Kinzley, Senior Vice President and Chief Financial Officer. Before we begin today, we would like to note that Black Hills will be attending the American Gas Association Financial Forum starting May 21st in Fort Lauderdale, Florida. Our leadership will be making a presentation and the materials and webcast information will be posted on our website at www.blackhillscorp.com under the Investor Relations heading. 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 Linn Evans.

Thank you, Jerome. Good morning, everyone and thank you for joining us. Starting on Slide 3, I will cover highlights of the quarter, Rich will then provide a financial update, and then I’ll finish with the discussion around our strategy. Moving to Slide 4, before I speak to the substance of the presentation this morning, I would like to note a couple of items. Our theme this year for our annual report was ready, and we incorporated that theme into our presentation this year. You will see messaging and branding and our customers are seeing advertising around ready that started earlier this year. Being ready for our customers requires initiative to enhance everything that we do, constant evolution in being easy to do business with. In the same way, we are improving how we can be ready for you, our investors, through improving how we present our investor materials. Going forward, our earnings presentations will be more focused on the current quarter’s results and current initiatives, while our investor presentation will include more strategy and more forward-looking information. You will note these changes in this presentation, where we have excluded some of our forward-looking long-term reference slides. These slides will be included in our investor decks for events such as the upcoming AGA that Jerome discussed. This does not in anyway signal changes in our strategy or operations, however. Moving to Slide 5, we had an excellent quarter from operationally and financially. Our operations teams performed exceptionally well during difficult winter conditions. We delivered strong quarterly earnings growth and advanced key strategic initiatives. We were ready for our customers’ energy needs, delivering safe and reliable service when they needed it the most. Safety is our top priority in all we do, and I’m proud of how our team, our system…

Alright. Thanks, Linn and good morning everyone. I’m fighting quite a chest cold, so I have to step away from the microphone for a moment. Please bear with me, but I hope, I can get through this clean. I will start on Slide 8. As Linn noted, we delivered solid first quarter financial performance. Returns on investments made to benefit customers at our Gas Utilities and favorable weather year-over-year at our natural gas and electric utilities were the big drivers of the strong Q1 financial results. Our quarterly EPS, as adjusted, increased 6% year-over-year, despite dilution from 11% increased share count related to the equity unit conversion back last November of 2018. As a result of our strong first quarter, we increased our 2019 EPS guidance by $0.05 on each end of the range to $3.40 to $3.60 per share. We also reaffirmed our 2020 EPS guidance range of $3.50 to $3.80 per share. The assumptions related to our earnings guidance were detailed on slides 43 and 44 in the appendix. On Slide 9, we reconciled GAAP earnings to earnings as adjusted, a non-GAAP measure. We do this to isolate special items and communicate earnings that better represent ongoing performance. This slide displays the last 5 quarters and trailing 12 months as of March 31, 2019, and 2018. In Q1 2019, we had no special items. We did experienced special items in 2018, not reflective of our ongoing performance, all of which were income tax related. The first item reflected the impact of the Tax Cuts and Jobs Act throughout the year. The second and larger item related to tax benefits of legal restructurings completed in 2018. As part of an effort to simplify our legal structure in Q1 and Q4 last year, we restructured certain entities acquired as part…

Thank you, Rich. Now moving on to Slide 15, as discussed during previous calls, we grouped our strategic goals into 4 major categories: Profitable Growth, Valued Service, Better Every Day and Great Workplace. Our overall objective is to be best-in-class in everything that we do, and our ready branding and messaging complements this customer-focused strategy. We will drive future earnings growth through our customer focused investment program to better serve our customers’ needs. Based on our capital forecast, we expect to deliver long-term earnings per share growth above the utility average. In addition, we fully expect incremental growth opportunities from generation and other larger projects. We’re also focused on continuing to grow our dividend. We have increased our annual dividend for 49 consecutive years, one of the longest track records in the industry. Slide 16 helps us illustrate how we think about strategic execution. We are aligning our people, processes, our technology and our analytics around our customers’ needs. In addition to our investment for customers to deliver safe and reliable service, we are transforming our customer experience, working hard to know our customers well and making it easier to do business with us. We are driving growth through higher penetration, adding renewable energy and creating innovative tariffs to recruit new businesses. In particular, we are enabling the growth of data centers in our territories, which fit the unique attributes of our service territories. And we are investing in the safety and reliability of our electric and natural gas infrastructure systems, using a disciplined programmatic integrity program. Slide 17 illustrates the strategic diversity of our business culture. We have a mix of complementary gas and electric utilities across stable and growing Midwest states. The quarterly operating income chart on the left illustrates the seasonality of our earnings between electric and…

[Operator Instructions] Your first question comes from Michael Weinstein with Credit Suisse.

Hi guys. So, my first question has to do with the increase in the safety and integrity spending. This is a bit surprising given the roll forward was pretty recent. Is this being driven by the drive to consolidate and file rate cases at the utilities over the next year or 2 to Gas Utilities? And can we expect that this kind of significant programmatic increase again in a more frequent basis going forward?

Michael, this is Linn. As I said in my comments, we intend to try to do this one time a year, so we’re not doing anymore this year. We continue to refine our programmatic capital opportunities. We’ve got a group of engineers that have been doing that for some time. They continue to understand our system, dissect our system. And most of what we’ve added this time was due to the fact that we are starting to understand better the project scope and the timing of some of those investments that we’ve been looking at for a while. We’ve also, importantly, have been able to confirm the availability of things like materials and contractors. That was an emphasis of this particular quarter as well. And then we got some additional customer growth that we’ve identified. So that’s the bulk of what we’ve added this particular quarter. Going forward, we think we’ll be doing this mostly in the third quarter during that earnings call, unless and until we start to identify maybe larger projects as we go forward.

Are you still on track, I guess, to announce approximately 1 to 2 major projects a year that are not included in the capital forecast?

That’s what we currently think, Michael. Yes. We’ve got a number of projects that we have in the pipeline, if you will. And as we gain confidence in those, especially with regulators and the need and the necessity of those, then we start to bring those forward as we gain that confidence.

As you’re nearing the target mid-50s debt ratio, mid-50% debt ratio, you’re getting pretty close to that now. How are you dealing M&A as a growth path going forward at this point?

Our approach and perspective on M&A, hasn’t changed over the last several quarters. The premiums being paid is awfully high. Right now, we’d probably better offer our shareholders put a dollar in the ground, a dollar in the year and earn on that and we would be paid the $2 and only earn one of those is kind of how we see it. We’ll see what happens over time with respect to that. And we think we’re pretty good at it, but it’s not something that we’re focused on and it’s not part of our strategic plan right now.

Okay. Thank you very much. A nice update and I’ll pass along to other people.

Thank you very much, Michael.

Thank you. And our next question will come from the line of Julien Dumoulin-Smith with Bank of America.

Hey, nicely done on the capital upgrades here.

Thank you, Julien. How are you?

Good. Excellent. Happy Friday. If I can go back a little bit to Michael’s question a little bit. Can you comment a little bit more on the timing? It seems perhaps unique amongst peers, to accelerate CapEx especially into 2019. I know that the absolute numbers are going up. Was there also a shift in timeline on when these dollars and when projects are being spent too? I know obviously things are a little bit fungible, but sort of curious if it’s not only an increase but an acceleration of other projects that you’ve previously contemplated to?

Good question, Julien. Not so much an acceleration. No. There was some acceleration I would argue or at least firmed up some that we were hopeful to spend in ‘19 and ‘20 because we were not sure about materials and contractors. So that helps us firm up this year’s and next year’s capital more than what it was last quarter.

Got it. Alright, excellent. And then can you comment a little bit more on Nebraska specifically, both in terms of incremental opportunities out there, then also talk about just the sort of the process. Obviously, you filed this << obviously, you filed this two-part effort. Can you talk about just what we should expect in terms of when the tariffs get collapsed and how that kind of reconciles the process of the rate case as well? As well as the capital opportunities and then any future opportunities that come out of that as you think about that process, the capital spend process there?

Sure. Well, Nebraska is one of the states that we acquired with the SourceGas transaction. So, we continue to learn and evaluate what we acquired with SourceGas. Now it’s 3 years later, we have a pretty good handle on it, but we continue to learn and continue to understand especially as new – as we anticipate new FEMSA, for example, regulations be passed down and how we might need to comply with those and what that investment requirement might be. With respect to the consolidation, our intervention period, if I recall correctly ended last Monday and so that’s a one check box – milestone behind us with respect to the consolidation. We don’t expect approval until late 2019 with respect to a consolidation in November, but that is under – excuse me, in Nebraska, but that’s currently underway.

And then just to add to a bit to that and once approved and consolidated, we would then file the consolidated rate review, which would play out through 2020. So, the impact of that certainly won’t come until later next year.

Yes. We expect to be completely wrapped up with both the consolidation and the rate review by late next year.

Got it. Excellent. And then just to clarify in brief you alluded to a new tariff, I believe in Wyoming around some blockchain opportunities. If you can, is that incremental –when you think about incremental sales, I mean, obviously, it’s shifting customers from one tariff to another, also probably speaks a little bit as the leading indicator of growth. Is there something that’s pivoting here in terms of your expectations in that state just even in the last few months? Curious on what you could see as a result of this tariff specifically and also potentially other capital needs that would come behind it too, whether voluntary renewables or just low incremental low growth?

The blockchain load would represent incremental growth to us, our new load. It would not be changing from one tariff to another tariff. It would be new loads for us. And Wyoming, in general, as a state has worked very hard to be a home state, if you will, for blockchain. My recollection, they passed about 7 different statutes, pieces of legislation in 2017 that allowed Wyoming to be, in Wyoming’s words, on par with countries like Singapore, et cetera, with respect to being advantageous to register your cryptocurrencies and your blockchain mining kind of activities within the state of Wyoming. And so we see this as a great opportunity for us to partner with the states, local or economic development with the tariffs that we have put in place. There was strong interest in blockchain as you probably all might remember a couple of years ago, that seems to have tempered some with some of the cryptocurrency prices dropping, but we want to make sure we are ready for that and we are getting phone calls and we are speaking to future potential customers with respect to blockchain in Wyoming.

So, thank you very much. Feel better, Rich.

Thank you very much.

Thanks. Thank you, Julien.

Thank you. And our next question will come from the line of Chris Turnure with JPMorgan. Your line is now open.

Good morning. I wanted to get an update on Colorado legislation. I think today is the last day of the session. There’s a bunch of different bills out there, kind of which ones do you see as the most relevant and kind of what might those mean for your customer base kind of customer bills versus other utilities in the state?

Good morning, Chris, and thanks for the question. We’re watching those very closely. It’s very early as you just said. We have some house bills that have been passed. Probably the one that we’re watching the closest is the CO2 reduction bill that would stare step in a CO2 reduction of up to 90% by the year 2050 relative to the year 2005, and we understand that will be across the entire Colorado economy. So, obviously, we’re watching that very closely. It’s very early. We’ve had some introductory discussions internal to Black Hills, and so we’re frankly still analyzing that and look forward to see what’s ultimately passed before we start digging into it much, much deeper, but it would probably – based on what we’ve seen so far certainly have an impact upon customers likely requiring us to add more renewables, storage and things of that nature in the future. So much more to come and it’s very early for us.

Okay, great. And then another kind of relatively high-level question. You have a lot of different utilities in a lot of different states. How are you thinking about kind of earned ROE trends over the next 3 years in your base plan?

We don’t see a big change in earned ROEs. We feel like we’re treated fairly now, I would say, in all of our states. We just came out of a rate case in Arkansas, for example, finished that last December and we were pleased. We’d always liked better, but we were certainly pleased. So, we don’t see a reduction in ROEs coming, but we’re going to keep an eye on that of course.

Okay. So even as you kind of evolve through this set of rate cases and make a lot of investments, we shouldn’t assume that regulatory lag widens or changes or that your actual earned ROE trends lower?

No. We manage that as best as we possibly can under our circumstances, yes.

Okay. Thanks, Linn.

Thank you.

Thank you. And our next question will come from the line of Andrew Weisel with Scotia Howard-Weil. Your line is now open.

Hey good morning, everybody. Question on financing. So, regarding the incremental CapEx, if I compare that to the increase in your equity needs, it looks like your financing with about 50% equity this year and about 40% next year. You’ve been clear about expecting to continuously raise the CapEx. So, my question is, should we assume something like a 50% equity ratio on all incremental dollars or would there be a point where that might change?

This is Rich. I would suggest that would change as we move forward. This year with the outsized CapEx spend and then next year is a pretty strong capital year too. As you can see on our schedules, we did kind of finance pretty close to 50% of over the incremental capital we just added with incremental ATM as you pointed out. But again, as we move beyond 2020, I would expect our FFO to debt – excuse me, FFO to debt – debt to total capitalization to continue to improve. And so at that point, our cash flows would be covering the dividend and the CapEx pretty well and we wouldn’t need as much equity unless we continue to add significantly to the capital schedule, but smaller additions wouldn’t require 50% equity financing I would suggest.

Okay, great. Then just to clarify on the dividend. Rich, if I heard your comment right, you said you don’t want to reduce the amount of the increase. Did that mean we should expect 12% – sorry, $0.12 increases each year? That would obviously decelerate the percentage increase, but maybe that’s how you get toward the midpoint of the target for the dividend payout ratio?

Yes. I’m not going to speak to what our Board is going to approve in the future, but certainly in the last 2 years, we’ve done $0.12 increases in November with our third quarter earnings release. A pattern is kind of established there. And I think what you just described is probably reasonably accurate. We don’t want to decrease it. The amount of the increase and I certainly want to continue our track record of 49 years in a row of increasing it. So, I would say what you characterized is probably reasonably accurate.

Alright. Thank you very much.

Thank you, Andy.

Thank you. [Operator Instructions] Our next question will come from the line of Vedula Murti with Avon Capital. Your line is now open.

Good morning.

Good morning, Vedula.

I want to look at the Slide 10 here on the waterfall chart and I think you gave a discussion about it, but I want to make sure I understand with regards to the tax item on the waterfall chart on Slide 10. It sounded like from what you said that various tax credits and other types of things for whatever reason all tend to congregate on an accounting basis in 1Q such that if we roll forward and we look at waterfall charts through the rest of the year, decide [ph] will not be there. But if we think forward next year then simply there will be – whatever the differences between this year and next year would then be reflected principally in 1Q again. Is that correct?

Yes. This year is a little unusual, Vedula, and that we’re adding Busch Ranch II at the end of the year, which on our forecast, we’ve got that coming in basically late third quarter. So, you get 4 months of production tax credits, there is a state investment tax credit one-time that we get this year associated with that as well. And that’s the biggest driver of that tax item. Also the excess deferred income taxes that we set up back when we did tax reform at the end of 2017 are beginning to be amortized now. So, that’s a contributor there as well. In 2019, that’s kind of a new item. We’re starting to refund those amounts to customers. So, reduced income taxes, but reduced revenue on that particular item. But those are not one-time in nature this year, but they are kind of new this year and thus create the outsized tax impact in the first quarter. Going forward, I wouldn’t expect this to be as big barring additional renewable projects added or something like that, but hopefully, that answers your question?

How would we – how would you then maybe allocate between the items that you stated that comprise this line item? If – in terms of the return of the excess deferred income taxes and that’s something – if that’s an ongoing item, how much would that be kind of like this item here versus production tax credits and state tax credits from having a new facility come online?

Well, you can kind of glean some of this from our earnings release. The excess deferred tax item just at the Gas Utilities was $2.4 million in the first quarter of revenue, so that would equate to a smaller amount on the tax side because you have to tax effect that. The production tax credits and the investment tax credits, we’ve not disclosed those specifically, but they are pretty big chunk of the $6.7 million I’d say half or a little more. And there’s a couple of other – there are a couple of other items in there. Again, when you – GAAP requires us to look at our expected tax rate for the full-year, and then based on how much money you’ve earned in an given quarter, which in the first quarter, we earned about half of what we forecast for the year not quite, but close, we have to recognize that amount of it in the first quarter. So, that’s why it kind of stands out here.

Then maybe one less thing on this item. How much of this would you suggest is non-recurring as opposed to recurring going forward?

Well, certainly, the investment tax credit that we are getting in Colorado when we put the project into service will not recur, but the production tax credits will and the excess deferred income tax amortization will be a recurring item too. We set up about $300 million for that at the end of 2017 and that will amortize in over a long period of time.

I mean, so is it reasonable to think like maybe half of it is occurring and half not or how should we really think about that?

More than half is recurring.

Excuse me?

More than half of the benefits will recur.

Okay, alright. Thank you very much.

Yes.

Thank you, Vedula.

With no further questions, I will return the call back to Linn Evans for closing remarks. Please go ahead, sir.

Thank you very much for joining us for our call today and thank you for your interest in Black Hills and 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. Good day.