Good day, ladies and gentlemen, and welcome to the Black Hills Corporation Third Quarter 2020 Earnings Conference Call. My name is Josh and I will be your coordinator for today. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference 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.

Thank you, Josh. Good morning, everyone. Welcome to Black Hills Corporation's third quarter 2020 earnings conference call. You can find our earnings release and materials for our earnings call this morning at our Web site 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 2 of the investor presentation on our Web site 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. Thank you for joining us today. Moving to Slide 4, I'd like to start, as we always do at Black Hills, with a focus on safety, the safety and the well-being of the people we work with and the communities we serve is paramount and we are committed to being on the forefront of safeguarding our co-workers and our customers at all times and especially now. We continue to monitor the pandemic and its impact to our business, our customers and our communities, while some of the service territories are experiencing an increase in infection rates, we are not anticipating significant lockdowns to close our local economies. For our customers who need financial assistance, we are continuing to support them as well as local non-profits in our communities. I'm extremely proud of our team's dedication to support and serve our customers, they truly are going the extra mile to provide safe and reliable energy that our customers depend on as we improve life with energy every day. Overall, financial impacts from COVID-19 are trending as expected for the year. We continue to maintain strong liquidity to support our businesses and our supply chains and capital projects are operating with little impact. Moving to Slide 6, we had an excellent third quarter. We executed operationally and exercised diligent expense management delivering a 32% increase in earnings over the same period last year. Based on the strength of our earnings and outlook, we are increasing this year's earnings guidance to a range of $3.60 to $3.70 per share. We're also introducing guidance for next year in a range of $3.75 to $3.95 per share, reflecting our expectation for solid growth year-over-year. We also increased our five-year capital forecast to continue serving the growing needs of our…

Thanks, Linn, and good morning, everyone. I'll start on Slide 9. As Linn noted, we delivered strong financial performance for the quarter with EPS as adjusted of $0.58, up $0.14 from last year, driven by strong year-over-year Q3 results at our gas utilities. Notable in the quarter were returns on invested capital of our utilities, favorable weather impacts, customer growth and favorable tax items. We estimate weather positively impacted Q3 EPS by $0.05 compared to normal and by $0.11 compared to Q3 2019. Results for the third quarter of this year include negative COVID impacts of approximately $0.03 per share, in line with our expectations. Net income as adjusted increased 35% quarter-over-quarter, while EPS as adjusted increased 32% quarter-over-quarter, the difference driven by dilution from additional common shares outstanding from our equity issuance earlier this year. On Slide 10, you see we increased our 2020 earnings guidance and initiated our 2021 earnings guidance, as Linn noted earlier in his remarks. Our earnings guidance assumptions are shown in more detail in the appendix. On Slide 11, we reconciled 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 demonstrates the seasonality of our earnings. There were no special items in the third quarter this year. Slide 12 is a waterfall chart illustrating the primary drivers of our earnings results from third quarter of 2019 to third quarter of 2020. All amounts on this chart are net of income taxes. While I talk through the gross margin comparisons, I will refer to pre-tax margin impacts. Our Electric Utilities gross margin benefited from rider revenues, power marketing results and a pickup related to the Tax Cuts and Jobs…

Thanks, Rich. Moving to Slide 16. Our customer-focused strategy is designed to deliver sustainable long-term value growth for customers and shareholders. We're aligning our people, processes, technology and analytics to serve the growing needs of our customers and our growing communities. We are investing in our customers' needs for safety, reliability, resiliency, growth and an overall positive customer experience. These investments for customers positions us to deliver both long-term earnings and dividend growth for shareholders. Our programmatic approach to these investments also provides greater consistency and clarity for the benefit of all of our stakeholders. Turning to our capital investment plan on Slide 17. We added $239 million to our five-year forecast for a total of $2.9 billion focused on projects and initiatives that maintain customer safety and reliability and foster customer growth over the next five years. Most of the increased capital is related to additional programmatic investment in our gas utilities and more than half of the increase is planned for this year and next year. For this year, we are increasing our capital investment by $64 million to $733 million and for next year, we're increasing our capital investment by $78 million to $633 million. Going forward, we fully expect to invest at least $500 million annually to support our customers. We continue to take a relatively conservative approach to our capital forecast. We include opportunities that have a reasonable degree of certainty and then we add capital as we gain more clarity around incremental projects that will support our customers. We anticipate that additional capital opportunities are likely over the planned period, especially in the outer years. Slide 18 illustrates that our capital plan is utility focused with timely recovery on most of our investments, 95% of our forecasted investments are for our utilities and we…

Thank you. [Operator Instructions] Our first question comes from Michael Weinstein with Credit Suisse. You may proceed with your question.

On the ESG review and on the greenhouse gas review that's coming up, maybe you could give us an idea of where you're headed, especially after announcing coal-free Colorado generation fleet. Is that going to be something you're targeting over the long-term to replicate in other states as well?

Yes, we're very excited to announce our ESG goals, which we'll do on November 5. It's our current plan. We've been working on those very hard for about a year. We really started digging into what we could do with respect to ESG and be a little more holistic in our approach and how we talk about ESG and setting some goals. As you'll see on a couple of days when we share those goals, we are sharing goals that are true to our values in that you're not going to see a lot of caveats in those goals. They're going to be goals that we can achieve through current technology and things that we are currently doing and considering the life of our plants that we're currently operating. We are going to remain committed, as you'll see in the short-term to our coal plants. Those are vital to our customers in terms of the low price energy that we're able to provide them, especially reliable energy. But we've learned a lot about adding renewables, especially adding renewables that have been cost effective, especially for our customers. And as you pointed out in Colorado, Colorado has taken a very aggressive approach and a different approach and we've been very much at the helm with respect to that. We now have by far, well, the cleanest utility perhaps in the country, certainly there in Colorado. So you won't see again, you won't see a lot of caveats about the technology that yet to be invented things of that nature, but you're going to see goals that are aggressive, and the ones that we can achieve. And then, importantly, the next element of our ESG, especially with respect to our stakeholders, shareholders and customers will be when we plan or prepare the integrated resource plans. We'll be filing the IRP in Wyoming in mid-July. We'll also do South Dakota with that because we do those typically simultaneously and together. So that will be when we will then approach the commissions with the additions of renewables and things of that nature, Mike.

Is the extra gas utility programmatic CapEx for the next two years, is that mainly surrounding or is that for methane leak reduction or is that -- is this something that we can expect in another year or two, you'll be rolling forward and you'll have that, you'll be increasing the plan again in another two years or is this something very specific to the next two years that you're focused on right now?

You will see a very programmatic approach to our pipeline replacement. We've got about 4,000 miles of steel that we need to replace to get about 2,500 miles of plastic pipe. And then, by the way, we've got more than 160,000 meters that we call out risk that we're replacing as well. So our programmatic approach is really replacing that pipe. And along the way, as you'll see in our ESG goals later this week, you'll see that we get the benefit of reducing greenhouse gas emissions through that investment. And we see this as essentially a multi-decade type of investment going forward. So what we're showing you, we anticipate we will do for frankly a couple of decades.

So I mean, is another way of asking that is, can we expect additional increases in the five-year plans with every roll forward that we see going forward?

Yes. Thank you, Mike, for clarifying that. Yes, the answer to that question is yes. Well, we certainly anticipate, yes. Just like you've seen in the past.

Thank you. Our next question comes from Julien Dumoulin-Smith with Bank of America. You may proceed with your question.

And frankly, congratulations all around here. Well done. Absolutely. Question, you talked about "no material net impact from COVID" on your '21 earnings guidance. How are you thinking about the various puts and takes? And I want to acknowledge, you talked a little bit about this, but just want to think about the various sort of offsetting factors that you have explicitly reflected and that you could reflect as they move around here into '21, i.e., what's your level of confidence to able to sustain that no material net impact, if you will?

Yes. This is Rich, Julien. I'll start in and Linn can fill in the blanks. What we've seen is a really nice trend relative to loads. Certainly, in the second quarter, we saw the load impacts pick up on the small commercial side and a few large industrials with residential loads offsetting that partially. But as we work through the third quarter and now into the fourth quarter, we've really seen those load trends improve most of the large industrials are fully back on line. The small commercial loads have come back as our economies have reopened and residential loads have remained strong. So that's the load side of things. On the bad debt, we think we've got pretty good accruals. At this point, we accrued $3.7 million additional bad debt above what we normally would year-to-date through September. And then, on waived customer late fees, this is all on Slide 38 by the way in the appendix. On waived customer late fees, we think that's pretty much done now, given that we were able to reinstate disconnect policies for all of our utilities except Arkansas through the third quarter. Our [reridges] [ph] have come down substantially from peaking out in the third quarter. We're not quite back to normal but getting much closer to normal there. So when you look at all of those together, the last one being sequestration costs we incurred, we're done with that as well, we believe. When you look at all that together and then consider that we're continuing to save costs on travel and outside services, we think the impact in the fourth quarter is going to be pretty minimal. And as we work into 2021, the net impact is going to be immaterial as well. Linn, what would you add to that?

Yes. I think, Rich has done a nice job answering your question, Julien. I'd say, we've learned a lot. We've learned a lot about the virus, certainly more than what we knew back in May when we did some of our initial forecast with respect to the impact. We know how to keep our employee team safe. We know how to keep our customer team safe. We know more about how the virus spreads, things of that nature. And frankly, our customers have learned a lot more about and how they operate. And that shines through their usage and the loads that we are seeing beginning to really come back as Rich indicated, bad debt is declining or bad debt is down about 20% -- our reridges are down about 20% from the height of the pandemic. And as Rich said, also some of our largest expenses were relative to sequestering employees now that we have processes and understand that in place and know more about the virus. We don't anticipate having to do that as we go forward either.

Got it. Excellent. Well, good stuff team. Listen, if I can pivot a little bit more strategically here. It's more of a Linn question perhaps. How do you think about the bifurcations and valuations out there across various kinds of utilities. Certainly, I'm curious to hear how you think especially if this is a bad administration how decarbonization of gas utilities perceive. But separately how do you think about the sharp deviations out there in the SMID caps and especially gas utilities today. You can comment a little bit.

Yes. Thank you for that, Julien. Yes, we've got questions, just like you do. We're kind of surprised frankly by how SMIDs have not seen valuations respond of our business essentials. Our business metrics are very good right now, very solid as we've been able to establish over the last couple of quarters as we've dealt with the pandemic. You mentioned the Biden administration and we've been watching that very closely, very engaged in terms of the campaign promises and statements that have been made. We'll see how that actually translates into either legislation or orders, assuming that becomes President Biden in the White House. We think that typically that means, we might have to accelerate some of the ESG goals that we're going to express next week as we drafted to those. We did not try to consider a change in the While House. We make goals that we felt strongly that we could do and we could accomplish with current technologies and what we know today, should there be a much more aggressive stance against climate change and greenhouse gas emissions, et cetera, we may have to accelerate some of our investments on behalf of our customers. And you mentioned natural gas specifically, we see natural gas as a long-term fuel. I don't see it simply as a bridge fuel, especially in the territories that we currently serve. We take that very seriously when it comes to customer choice. We have pulled our customers and things of that nature across our northern Great Plains tiers and Rocky Mountain region. It's very clear to them that their natural gas and their choice around natural gas is very important to them, especially when it comes to heating bills and things of that nature. So we're certainly not ostrich with our head in the sand around natural gas. We're at the table with the American Gas Association and other entities when it comes to the use of hydrogen, things of that nature. So we have a group of people very focused on, what we call force electrification across our organization, how we actually combine our efforts with other utilities in the region. We partnered with other investor owns, especially in Colorado, in response to, for example, the commission information meeting that the PUC is going to have there shortly, partnering also with the AGA in terms of our comments, et cetera. So, kind of a broad question and broad answer, but maybe that shares with you some of the thoughts I have in my head and how we're looking at our strategy here at Black Hills.

I appreciate it. Actually, trying to go back real quickly on just a detailed question for Rich here, if you don't mind. On the equity, you obviously tweak that a little bit here. Can you talk about like the timing perhaps a little bit? You all did it quite well this year. So I'm just curious on thought process there. And then, more importantly, as you move out, right, you obviously rate things as well. You talked about that $5.5 billion range give or take. What are you thinking out there at this point, Rich?

Yes. So what we've said in the past is that with the previously disclosed CapEx, we would need upwards of $50 million of equity next year. And then, we would need $0.25 to $0.30 on the dollar for additional CapEx of which we just disclosed an additional $239 million, about a little over half of which $142 million is in 2020 and 2021. So that's really what drove the $80 million to $100 million next year that math should make sense. And then, when you think beyond next year, we did add about $100 million of CapEx to those years. So we probably will need some equity after next year, not a substantial amount, but again, as we continue to increase CapEx, we're going to continue to sprinkle equity in there to help fund that. That makes sense, Julien?

Absolutely. Thank you for the clarity rather. Appreciate your patience and best of luck. We'll see you soon.

Thank you. Our next question comes from Andrew Weisel with Scotiabank. You may proceed with your question.

First question, just to elaborate on that last comment you are making. Going forward, should we still think of $0.25 to $0.30 of equity for every incremental dollar of CapEx, is that still a good rule of thumb?

Yes. I think that's fair, Andrew.

Okay, great. Next, I wanted to ask about the CapEx recovery. You talked a bit about this but it looks like the numbers have moved around with less spending now considered eligible for timely recovery. It looks like it's about 70% now versus 80% previously. Just wondering, have you reclassified certain projects or is something else going on there, may be something to do with recovery of the incremental spending?

Well, our gas utilities are over 80% timely and electrics over 50%. Total is, I think, similar to past quarters. I'll have to verify what you're asking.

Well, I just mean you have, in the past, you've talked about 80% as being recoverable and now you're saying it's about $2 billion out of the $2.9 billion. And just based on your disclosures on Page 32, I'm getting that around 70% versus 80% in the past. Just wondering if there's anything noteworthy there.

The $2 billions is a new sub-header we added. There's probably some rounding involved there, I would say, Andrew. But when you think of the timeliness of recovery. I think the reality is, it's fairly consistent with what we've seen in past disclosures, I will agree.

Okay, great. Maybe I'll follow up on the numbers offline. Then one last one, with the new CapEx outlook, what's your latest thinking as far as rate-based growth going forward.

Well, we haven't disclosed a specific rate base growth rate. As Linn said, we plan with our year-end earnings release to put some more color around long-term growth rates, whether that's earnings growth or rate-based growth we're going to give you some more color in a quarter on that. As you just work with the information we've disclosed, obviously, our rate base growth have been very strong in 2019/2020 and it's looking good in 2021. And as you think about the opportunity to increase CapEx in those outyears, we think it's going to remain strong. So that's the employee you got to work with right now more to come.

Thank you. [Operator Instructions] Our next question comes from Brandon Lee with Mizuho. You may proceed with your question.

The first question is around COVID, the impact on your load. Since the third quarter, it looks like the cases have picked up in your service territory. Have you seen any changes in load since the end of the quarter?

Good. We have seen actually -- while we've seen a tick up in cases, you are correct there. We continue to also see load usage continue to rebound through the third quarters and into the fourth. So they don't necessarily seem to be connected, at least in our territories. It doesn't mean they could not be at some point, but currently, as I indicated before, it seems our customers are learning how to operate in spite of COVID, if you will. And so, we're seeing the residential load continue to be strong. We anticipate as people continue to work from home in much of our territory that will remain strong and that will probably translate perhaps into the natural gas side of the business as well in the early heating season as people might be staying home. We're also seeing a very strong industrial loads in Wyoming that's probably because of our strong focus -- it is because of our strong focus on datacenters there, which is offsetting some softer loads that we tend to be still be seeing in Colorado and South Dakota, but overall seeing good load increases but trending very much back toward normal and frankly growing, especially on the natural gas side. Hopefully that helps you there.

Yes. Great. And then, also just given the decline in the [LDC] [ph] multiples, have you noticed any change to new jurisdictions regarding gas CapEx or any pushback from regulators on your planned CapEx.

I would say, the short answer is no. But it's obvious in Colorado, that the Commission is looking at how they implement the Clean Energy Plan is what I will call it. The Clean Energy plan does not necessarily -- it does not call out natural gas, it really focuses on the electric business. But given the commission or information meeting that's scheduled to come up soon, we'd be watching that very closely there with respect to our ongoing opportunities. I will put it with natural gas. But again, our customers in Colorado are pretty enthusiastic about their natural gas usage and really want that mix of energy available to them. So much more to come with respect to that.

Thank you. [Operator Instructions] And with no further questions, I will turn the call back over to Linn Evans for closing remarks.

Thank you, Josh. Thank you all for joining us this morning. I will look forward to sharing our ESG goals later this week. We're really looking forward to virtually seeing many of you at the EEI Financial Conference next week. And thank you all for your interest in Black Hills Corp. Please remain safe healthy, enjoy a safe day and thank you again.

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