Good day, ladies and gentlemen and welcome to the Black Hills Corporation Third Quarter 2019 Earnings Conference Call. My name is Daniel and I will 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 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, Daniel. Good morning, everyone. Welcome to Black Hills Corporation's third quarter 2019 earnings conference call. Before we begin today, we would like to note that Black Hills will be attending the EEI Financial Conference starting November 10th in Orlando, Florida. Our leadership will be making a presentation at the conference and the materials and webcast information will be posted on our website at www.blackhillscorp.com, under the Investor Relations heading. Leading our quarterly earnings discussion today are Linn Evans, President 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 two 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 this morning and for your interest in Black Hills. Before I dive into the quarter's results, I'd like to start this meeting, as we do all the meetings at Black Hills, with a safety focus. First, I'd like to personally thank the teams who have been maintaining and hardening our infrastructure systems over the past several years. This winter has already hit much of our service territory within the past several weeks. In a recent snow storm, our system sustained some pretty stiff winds here in South Dakota, with wind gust greater than 80 miles per hour at one point. It's noteworthy that despite those conditions, we did not experience a single customer outage related to the storm. I believe that says a lot about the team of men and women who are designing, constructing and maintaining our systems. Many of that team are listening to this call today, or will later on and I want to take a moment to say thank you for your focus on safety, while you maintain a persistent focus on keeping yourself, your fellow teammates and our customers and our communities safe every day, well done. I'll start on slide five. I am pleased with our solid third quarter results, earnings met our expectations. Our operations team performed well and we made excellent progress executing our strategy to grow long-term value for both, our customers and our shareholders. On the left side of the slide, being ready for our customers, is what we focus on every day. We continue to deliver for the safety, reliability and the growth needs of our customers and the communities we serve. We're focused on the safety and integrity of our infrastructure systems, using a long-term programmatic…

Thank you, Linn and good morning everyone. Excuse me, I'm going to start on slide 9. As Linn noted, we delivered solid third quarter financial performance that met our expectations. We remain on track to hit our earnings targets for 2019 and 2020, and we narrowed our guidance range for both years by $0.05 on each end. Updated assumptions for our 2019 and 2020 guidance are included on appendix slides 45 and 46 of this presentation. Third quarter EPS as adjusted was $0.44 compared to $0.42 in Q3, 2018. We estimate that weather negatively impacted results by $0.02 compared to last year's third quarter and by $0.06 compared to normal weather for the quarter. I'll talk in more detail about weather impacts when I discuss business segments in a few slides. Aside from weather, results were strong for the quarter, with net income as adjusted increasing by 16% compared to last year, overcoming 11% dilution from increased share count. On slide 10, 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 30th, 2018 and 2019. For the first half of 2019, we had no special items. In the third quarter of 2019, we recorded a non-cash pre-tax impairment of $20 million or $0.25 per share after tax related to an investment in a privately held company. In late 2017, we elected to discontinue our oil and gas business. We sold the vast majority of the assets of that business during 2018. As part of the divestiture, in early 2018, we contributed certain assets valued at $28 million into a third-party oil and gas company for a minority ownership…

Thank you, Rich. Moving on to Slide 16. We are growing earnings as we invest in our customers' needs. We're centered on system safety, integrity, reliability and customer growth. Based on the current opportunities across our expansive infrastructure systems, we expect to deliver long-term earnings growth above the utility average. We also expect to realize incremental growth opportunities from generation and other projects. Slide 17 illustrates how we think about executing our customer-focused strategy. We work to allowing our people, our processes and the use of technology and analytics to meet and support our customers growing energy needs. Slide 18 illustrates the strategic diversity of our utility business and the seasonality of our earnings. You'll note that our third quarter earnings were driven by the electric utilities, while we expect the fourth and first quarters to have much stronger gas utility results. Slide 19 illustrates our expansive electric and natural gas infrastructure systems. These systems across eight states provide a strong base of organic opportunities to invest in maintaining and modernizing our grid for customer needs. Moving to slide 20, our capital plan over the next five years is focused primarily on projects and initiatives that maintain safety and reliability and fosters customer growth. You will note that our forecasted investment far exceeds depreciation, which will translate the future earnings opportunities. We have refreshed our five year capital investment forecast and have added $148 million of investment opportunities, with the largest portion of that increase in the gas utilities. So now we plan to complete $820 million of capital investment in 2019 and $2.9 billion through 2023. Beyond 2023, we expect the base of at least $375 million in recurring utility capital opportunities. We've included that detailed by utility in the appendix to our slide deck. We take a relatively…

[Operator Instructions] Our first question comes from Julien Dumoulin-Smith with Bank of America. Your line is now open.

Hey, good morning, team.

Good morning, Julien.

Hi, Julien.

Howdy? So perhaps first can you comment a little bit on the Wygen process and just in terms of the potential pathways here to just come into resolution here? I know you – perhaps we've talked about this little bit in the past. But just given where we stand today with FERC just can you elaborate a little bit on the potential pathways and how you see things as they stand today a little bit more detailed? And then I've got to follow-up on some numbers.

Sure. We filed as we stated as you know the FERC to approve the amended PPA or a new PPA between the affiliate companies. We received a request for further information from FERC staff solidifying or asking for verification of when the new PPA would start. And so we filed or we submitted our response to that which then reinitiated the time period for them to decide that particular application. So we are literally just simply waiting for FERC to make the decision as we speak.

Got it. Or maybe I should have asked it in the context of if FERC doesn't act what are the other avenues here? Just to clarify.

There are [indiscernible]. We simply wait for them at this point. They have a statutory I believe timeframe within which they make that decision. That statutory timeframe is not run. And so we're waiting for that decision.

Okay. All right. Fair enough. Can I turn back to some of the 2020 guidance updates too here? Can you just clarify a little bit further, just a thought process on the higher equity? Clearly, raising CapEx in tandem, I suppose I broadly understand that. Just to elaborate a little bit further on just the uptick is that simply to fund that CapEx. Are you thinking about shoring up the balance sheet? And where does that stand at this point? That's probably the best way to ask that about the increased equity I suppose.

Yeah. I mean, clearly, it's the increasing CapEx, Julien. Increasing this year and next year's CapEx by $83 million. We took the equity needs that were in the prior guidance at $40 million to $80 million up to $80 million to $100 million and ties to that CapEx increase and just our continued effort to not only shore up the balance sheet, but make sure for regulatory proceedings we're getting at debt to total cap moving the right direction.

Got it. Right. So with respect to the actual FFO to debt metrics that you're thinking about nothing really moving around, you're not really shoring up the balance sheet, but for funding incremental growth here, right?

Yes. Exactly.

Okay. Excellent. Anything else with respect to jurisdictions that we should be focused on here? Obviously, seeing the stock under certain amount of pressure today. So I just want to perhaps provide a little bit of a platform to make sure we're not missing anything on any of the jurisdictions.

No. We've got the pending rate cases, which we just went through those are going well from our perspective taking risk off the table with each one as we reach a settlement. For example, in Wyoming, we had a one-day hearing not too long ago in Colorado. And we are now waiting for the ALJ decision, which will then go to the commission for approval. And Nebraska, we received approval to consolidate the two utilities there. And so now we're setup well to consider filing our rate case in 2020. So things are going quite well there.

Excellent. I’ll leave it there. Thank you guys.

Thank you, Julien.

Thank you. [Operator Instructions] Our next question comes from Michael Weinstein with Credit Suisse. Your line is now open.

Hi. Good morning.

Good morning, Michael.

Maybe you could just go through some of the priorities you see going forward as you increase the capital program or capital plans in the outer years. What kinds of projects that goes for what kinds of programs do you think will start to ramp up throughout the mid-2020s as we head into the next decade? And where do you see the need for capital spending?

Thank you. As we indicated in our comments, we're seeing quite a bit of opportunity in the natural gas utilities. As we did the SourceGas acquisition and combined our two systems together, systems we acquired from Aquila in the North a decade ago and system in Cheyenne and SourceGas system. We're finding lots of opportunity with respect to mitigating risk and shoring up and improving our system. For example we have at-risk meters in several of our states where meters were installed near streets and away from homes and things -- and buildings and things of that nature. We've got thin wall pipe that we have identified across our territory. We have some bare steel, we continue to refresh and replace. We have farm taps in many of our states. So, we've inherited a number of farm taps that have challenges with -- that are related to them with respect to customer safety. So, we have worked very diligently with our commissions and have programs in place now to replace those farm taps. And that's going to take us a couple of years to complete that. Now, we also have some cathodic steel opportunities that we're focused on. So, we've got opportunity to continue to make safe and continue to keep safe our natural gas utilities. While also as we mentioned we've got the opportunity for the additional CapEx as we add renewables. The project for Corriedale while we haven't started construction, we are oversubscribed. And so that's given us an opportunity to take advantage of some procedural rules with our South Dakota commission to ask for an increase in that tariff which will allow us to match additional capital spending with respect to that project. And of course Busch Ranch II represents the opportunity to continue to meet the renewable portfolio standards we have in Colorado. So, I think at a high level that's the things that we're really focused on Mike and continuing for that as we call the programmatic spending as we continue to appreciate understand the system that we're responsible for maintaining.

Great. And just a quick follow-up on one of Julien's questions. Do you see the $80 million to $100 million of equity next year as sort of an ongoing number beyond that like a recurring annual type number? Or do you think it will decline? Because remember in the last earlier before you used to think that it would be $80 million to $100 million in this year and then down to a lower number for next year. I'm just wondering if it does decline if it declines in 2021 now instead of 2020. Or do you -- yes.

Yes, based on the CapEx we've disclosed in 2021 and beyond, Michael, I would expect some decrease in equity needs after this year. The $80 million to $100 million for 2020 clearly is a reflection of the $83 million increase that we disclosed for 2019 and 2020. So, yes, if we find more projects and that CapEx goes up in 2021 and beyond which we hope certainly happens, we'll be happy to continue to issue $80 million to $100 million of equity each year if the CapEx numbers are higher. But again based on what we've disclosed at this point, I would expect that to decrease after 2020.

And the CapEx, Mike, that we have disclosed this morning do not include any special projects either which I think is noteworthy. It really is ongoing recurring kind of spending that we're identifying.

As an example Linn talked about the potential expansion of Corriedale. That additional CapEx which would probably be close to $20 million is not in our disclosed number until we get that shored up.

Right, understood. As we say those are good problems to have. Thanks a lot. Have a good day.

Thank you, Mike.

Thanks Mike.

Thank you. [Operator Instructions] Our next question comes from Andrew Weisel with Scotiabank. Your line is now open.

Hey, good morning everybody.

Good morning Andrew.

My first question is sort of -- I want to get into the long-term EPS comment that you made that you expect growth to be above utility average. I want to ask about it in an indirect way though. So obviously, the dividend increase of 6% as you've shown in the slide that's taking your payout ratio up to the higher end of the targeted 50% to 60% range. Should we take that to mean that you would think your future EPS growth will be 6% if not faster? Or are you just more indicating that you're comfortable at the high-end of that payout range?

Well we're certainly indicating the latter that we're comfortable with that range and we can stay within our 50% 60% given where we see earnings going. So I'll just say yes, to the latter part of the question.

Okay. Fair enough. Then if you could just quickly remind us the impact of the Wyodak coal contract repricing about $0.30 lower. I believe on the last call you said you're expecting an impact of about $1 to $1.50. So obviously a pretty big change there. If you could just talk about what caused the numbers to kind of shake out where they did and how that's going to flow through. That would be pretty helpful.

Well we've talked about how that repricing mechanism works in the past. That's got three factors. One is Powder River coal prices. One is the cost to transport coal into that site. And then third is the levelized cost of an offloading facility that would have to be built there. Again to keep the locational advantage that we have with the mine mouth coal at that site. So some of that's fairly mechanical and was somewhat set up in the 2014 repricing. And that may what [Indiscernible] excuse me what Powder River prices were over the 12-months preceding the negotiation impacted that as well. But yes, good outcome. It's a quarter less or roughly $0.30 less than where we were before. 1.25 million to a 1.5 million tons get delivered to that plant each year so.

Okay. Thank you very much.

Good outcome.

Thank you, Andrew.

Thank you. With no further questions, I will return the call back over to Linn Evans for closing remarks. Go ahead sir.

Well thank you. Thank you very much for joining us today. We appreciate your interest in discussing what we think was a real solid quarter. We look forward to seeing many of you at EEI financial conference next week. And we wish all of you safe travels to Orlando. We also look forward to updating you on our progress in about three months time. Thanks very much for joining us today.

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