Good day, ladies and gentlemen, and welcome to the Black Hills Corporation Fourth Quarter and Full Year 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 fourth quarter and full year 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. 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 your interest in Black Hills today. Before we dive into our results, I want to start this meeting as we do with all meetings within Black Hills with a safety focus. I'd like to do that by recognizing our coworkers at our Pueblo airport generating station in Colorado. They recently achieved the coveted status as a Star Work Site as part of Osha's Voluntary Protection Program. This is the highest status given by the program and requires a three-year rigorous process is focused on creating a strong safety plan, executing on that plan, and successfully completing a thorough audit by Osha. In December, our team proudly raised the Star worksite flag at the Pueblo airport generating station, the safety focused by our Pueblo through their proactive planning and execution moves us toward our goal of being the safest utility in the industry. I'd like to pause and say very well done. Starting on slide five, we reported solid operational and financial performance in 2019 and our team executed our customer-focused strategy to grow long-term value for both our customers and our shareholders. We continue to deliver safe and reliable service. We invested in significant capital to serve our customers' needs. We rolled out innovative growth solutions and we made progress on key regulatory initiatives during the year. As a result and as a team, we delivered earnings above our guidance midpoint in 2019. Our team delivered on our core responsibility of providing safe and reliable service to our nearly 1.3 million utility customers, we successfully executed our capital plan, investing $850 million of capital in 2019, the majority targeted towards safety and system integrity. We made solid strategic progress, accomplishing a number of long-term goals. In addition to successfully executing…

Thanks Linn and good morning everyone. I'll start on slide nine. As Linn noted, we delivered strong fourth quarter financial performance, driving our full year EPS to the upper half of our 2019 guidance range. Fourth quarter EPS, as adjusted, was $1.13 compared to $1.05 in Q4 2018, reflecting a 13% increase in adjusted net income, partially offset by a 5% share dilution. Full year 2019 EPS as adjusted was $3.53 compared to $3.54 in 2018, reflecting 9.2% increase in adjusted net income offset by a 9.5% share dilution. I'll discuss operational earnings driver by business segment in a few slides, but we'll address consolidated weather earnings impacts here. Weather favorably impacted consolidated results compared to normal in both 2018 and 2019. In the fourth quarter of 2019, we estimate weather favorably impacted EPS by $0.04 compared to normal, which was $0.02 less favorable than the fourth quarter in 2018. For full year 2019, we estimate weather favorably impacted EPS by $0.06 compared to normal, which was $0.03 less favorable than 2018. 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 we believe better represent our ongoing performance. This slide displays the last five quarters and trailing 12 months as of December 31st, 2018 and 2019 and demonstrates the seasonality of our earnings. In the third quarter of 2019, we recorded a noncash pretax impairment of $20 million or $0.25 per share after tax related to an investment in a privately held company. We covered that in our third quarter earnings release. Special items in 2018, not reflective of our ongoing performance were all income tax related. The first item reflected the impact of the Tax Cuts and Jobs Act during 2018. The second…

Thank you, Rich. Moving to slide 18, our customer-focused strategy grows long-term value for customers and shareholders. We are focused on being ready for our customers' needs for safety, reliability, growth and a positive experience. As we grow, we continue to adapt to enhance value of our service. We are aligning our people, processes, technology and analytics to serve our customers and grow our company. A prime example is our programmatic-based approach to safety and integrity investment to align all of our stakeholders. Our long-term approach not only prioritizes investment by risk and customer need, it provides clarity and consistency, a clear line of sight creates more predictable operational, financial and regulatory processes. Being ready for our customers is being ready for our shareholders, as we invest in responsibly growing the value of our service to customers, earnings grow alongside our customers and communities through a sustainable foundation. Based on the system needs across our expansive infrastructure, we expect to deliver long-term earnings growth above the utility average. We also expect to realize incremental growth opportunities from generation and other larger projects. Combined with our disciplined approach to dividend growth, long-term shareholder returns are expected to remain strong. Slide 19 illustrates the strategic diversity of our Utility business and the seasonality of our earnings. You'll note that our fourth and first quarter earnings are driven by the Gas Utilities, while the third quarter typically has stronger Electric Utility results. You'll also note that last quarter, we started providing you greater clarity of our diversity by including rate base estimated by state as of the end of the prior year. The chart on the right illustrates this and is updated as of year-end 2019. Slide 20 further illustrates our strategic diversity, our expansive electric and natural gas systems require significant investment…

Ladies and gentlemen, we're ready to open the lines for your questions. [Operator Instructions] Our first question comes from Julien Dumoulin-Smith with Bank of America. Your line is now open.

Good morning guys. This is actually Ryan Greenwald on for Julien. Thanks for taking our questions.

Good morning.

So, on Slide 22, with the 78% timely recovery, does that take into account the unfavorable decision in Colorado?

Technically, no. That's an ongoing process. We'll see where that ends up. But it's a smaller rate request on our parts, so it wouldn't move those numbers much anyway. However, it comes out.

That rate increase request was about $2.5 million.

Right.

And do you guys have clarity on what the rate decrease would be if the decision kind is approved?

No, not really. There are a variety of recommendations in the area of J.D.'s recommended decision. We've made -- yes, we file our exceptions to that. We're now working our way through the process.

Got it. And then are you able to provide any color in terms of the split in Colorado with RMNG and then the consolidated entities?

Please ask second question again.

In terms of how you guys are thinking about CapEx spend in Colorado between RMNG that has the rider and then the consolidated entities?

Yes, RMNG is separate from, we're requesting to consolidate the two Colorado Gas district -- LDCs, Rocky Mountain Natural Gas is separate.

Are you able to provide color in terms of the capital for the state, the breakout between the two?

We have not broken that out. We include Rocky Mountain Natural within just the Colorado Gas total.

Got it. And then just lastly, in terms of the incremental equity, what are your latest thoughts on the out-years and how you're kind of thinking about that?

Yes, what we've said in the past couple of quarters is that there are incremental CapEx additions. You're probably going to see $0.25 to $0.30 on the dollar of incremental equity. If you think about the additional CapEx we added for 2019 and 2020 is about $76 million. We increased our midpoint of our equity needs this year by $20 million. So, that's about that ratio.

Got it. Thanks for the time.

Thank you, Ryan.

Thank you.

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

Hey good morning guys.

Good morning Mike.

Hey just on that last -- just a follow-up on the last question. So, would it imply that a normal equity, I guess, starting point every year is around that $60 million to $80 million mark and maybe it goes up from there as more capital projects are added?

No, I think if you look at our CapEx after 2020, Mike, there's probably minimal equity needs for the CapEx we've disclosed after 2020, but there may be a little in 2021, again, to keep healing the balance sheet up a bit, but really not significant equity needs based on the disclosed capital after 2020, but as we add capital, that's where the incremental $0.25 to $0.30 on the dollar of equity will come in. Does that make sense?

Right. Yes, that makes sense. And in terms of payout ratio, you guys are, I guess, close to the top end of your targeted range. Is that -- you would expect that to come down into the middle of the range over time as earnings grow or what are you thinking there?

Well, we've raised the dividend $0.12 each of the last two years. We would anticipate to continue to grow the dividend, probably at a rate like that, assuming the Board keeps approving the dividend increases. So, I would expect the payout ratio to start to decrease as we get past 2020. So that should give you some indication of what we're thinking about earnings growth.

Got you. And in terms of the debt ratio, I know you're still targeting a mid-50s type debt ratio over time. But are you actually under any pressure from the rating agencies to lower it? I mean, higher leverage is always a nice thing, I suppose? Or are you under any pressure from regulators to lower it?

Well, not on the rating agency side, Mike, not really, we're in good shape there. We believe our other metrics such as FFO and so forth are all in a great shape. It's really more about the regulatory construct, and we'd like to get that down closer to mid-50s for those outcomes.

Right. One question on Wygen. Hypothetically speaking, if the ball was thrown back in your court on contracting or getting a competitive price for contracts, would you reconsider rate basing at that point? I mean, is that something that you might revisit if you had to?

Good question, Mike and thank you for it. We have a number of options. Of course, we hope that FERC will approve the current PPA that we have proposed, we anticipate, hopefully, hearing from FERC, if they follow their normal routine about the end of this month in February. But as you said, hypothetically, our team is focused on what if, what if we don't get the approval from FERC. And if you look at it from the utilities perspective, there's about 60 megawatts of capacity need that will immediately come upon us at the end of 2022, early 2023. And so our team is considering a number of options with respect to what we might do with Wygen I and how we might meet that need, the capacity need on behalf of our Cheyenne Light customers. You look at it from a generation perspective, there's a couple of agreements that we put into our 10-K with respect to 50 megawatts of capacity that's expiring, a PPA that's expiring late 2023. We also have an all-requirements contract with another utility that expires around that time. So, we'll go through the process of the integrated resource plan, plan to file that next year. And so with that process, we'll learn about capacity needs within our part of the country, et cetera. But it's a worst-case scenario; we probably have to build something else for Cheyenne Light perhaps another natural gas plant, something of that nature. Again, we'll decide that through the ERP process. Now, we'll see what the opportunities are with respect to capacity in the west at that point as well.

Okay, all right. Thank you very much.

Thank you.

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

Good morning.

Good morning Vedula.

Following up a little bit on Wygen and FERC, does -- during this process, one of the issues you'd highlighted was the fact that there were very few market transactions to -- on which to base a valuation to present to FERC. Is the transaction that's being proposed by NorthWestern with regards to purchasing coal strip -- a portion of coal strip considered a market data point that would be considered by FERC in evaluating the PPA?

In my opinion, no, Vedula, not at all. In fact, that's why we filed the application. We did file, as you may recall, we entered into a contract, a PPA with the City of Gillette, actually using Wygen I. So, our position in front of FERC is that meets the "Edgar test" and should hopefully give enough evidence for FERC to approve the PPAs that we have before them. But no, we don't consider the $1 that NorthWestern paid for the capacity of the coal strip would be a really a viable option for FERC to consider.

Okay. And so -- and you expect a decision from FERC by the end of the month?

Well, potentially, if they follow their normal 60-day rule, if you will, or a practice, we filed responses to two questions they asked us right before Christmas, December 23, and so if they follow their normal practice. So, we would expect something in the -- yes, late February, perhaps.

Okay. And can you give me -- maybe you've discussed this before, and I just don't recall, what's the context around the issue about not wanting to -- in Colorado about not consolidating the two gas utilities in terms of the current filing that's pending? And at this point, what is the timeline for a final CPUC order?

Good questions. In terms of the process and where we are, we have filed exceptions to the ALJ's recommended decision. We also filed comments or responses to exceptions that were filed by other interveners. As we look at the procedural schedule, technically and legally, we could put new rates into effect in accord to our application on March 1. So, with that understanding, it's our anticipation that either the ALJ or the commission, either one could pick up the exceptions that have been filed and then determine the decision on the pending case. As to consolidation, we think it's the absolute right thing to do. We were very fortunate in Wyoming. The way we were treated there and that we're going to have -- we had great success there. It's been to really streamline both the commission's efforts and our efforts in that stage, and we hope that Colorado will soon follow suit. Should they not, I think we probably are in a position where we file yet another request and another rate application to continue to pursue that opportunity.

So, if the rates to go into effect on March 1st, when would a decision need to be issued by the CPUC?

We really don't know. The last kind of the point is that's a time line that's certainly within the procedural process. So, we anticipate perhaps the commission can pick it up essentially any day.

Okay. Thank you.

Thank you. 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 your interest in Black Hills and I really thank our coworkers for delivering a fantastic 2019 and looking very forward to our success in 2020. So, I want to make sure -- just thank our coworkers so much for what they do for our customers and our shareholders each day. And thank you for your interest in Black Hills and have a safe day. Thank you.

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