Good day, ladies and gentlemen, and welcome to the Black Hills Corporation Fourth Quarter and Full Year 2020 Earnings Conference Call. My name is Gigi [ph] 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, Gigi. Good morning, everyone. Welcome to Black Hills Corporation's fourth quarter and full year 2020 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 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 today. As we look back at 2020, I couldn't to be proud of what our team has accomplished. Throughout an uncertain and disruptive year I admired how the Black Hills Energy team rose to every challenge head on. I'm especially pleased how our team always kept their health and safety, and our customers health and safety at the forefront, as we successfully executed our customer focused utility strategy, all while delivering strong financial performance that exceeded our guidance. I believe most of us will look back on 2020 as a year of seemingly endless challenge. And it is these challenges that prove the character and resilience of an organization and make us stronger. Like those before us for the past 137 years of Black Hills we adapted, we rallied together and we worked hard, truly exemplifying our ready-to-serve commitment and the incredible spirit within our team. The Black Hills Energy team once again deliver a long list of accomplishments for our stakeholders throughout 2020. Slides four through six highlight the success of consistently delivering on what we said we would do. What I'd like to refer to as delivering a high "say do" ratio. Safety is our number one priority of Black Hills each and every day. And is this priority and our genuine concern for our fellow coworkers, our customers and our communities, that gave us a solid foundation upon which to confront the pandemic and build a stronger future. For the seventh consecutive year our safety culture produce an injury incident rate better than the utility average, demonstrating progress on our goal to become the safest utility in the industry. Our team combined with our resilient infrastructure advanced our reputation of delivering industry-leading reliability for our…

Thanks, Linn, and good morning everyone. I'll start on slide 11, where you can see we delivered an 8.8% increase in EPS as adjusted for the fourth quarter, and a 5.7% increase for the full year compared to 2019. 2020 adjusted EPS of $3.73 came in just above the top end of our guidance. Full year earnings were driven by strong margin growth from returns on our invested capital, new customer growth, excellent cost management and tax credits. These positive drivers overcame net COVID impacts and higher share count. Net full year COVID impacts of $0.07 were consistent with our forecast. This includes net load impacts and net expenses associated with the pandemic, which are detailed on slide 35 in the appendix. Net weather impacts for the fourth quarter and the full year were fairly nominal, which we estimate is $0.01 lower than normal in Q4, and $0.05 lower than Q4, 2019. For the full year weather was $0.03 higher than normal, but $0.03 lower than 2019. Slides 12 and 13 contain waterfall charts illustrating the primary drivers of our earnings results comparing Q4, 2019 to Q4, 2020 and full year 2019 to 2020. All the amounts on these charts are net of income taxes. As you can see, both the quarter and full year shows strong growth in margins at our natural gas utilities when compared to 2019. This was driven by new rates from our constructive regulatory outcomes in Wyoming and Nebraska and by riders across our service territories. Customer growth across our service territories also contributed nicely to margin in 2020. Our electric utilities and non-regulated margins also increased for the full year. O&M increased by only one half a percent for the full year. And that's including the O&M we incurred related to COVID. We are…

[Operator Instructions] Our first question comes from the line of Michael Weinstein from Credit Suisse. Your line is now open.

Hi, guys.

Hey, good morning. Mike.

Could you just talk a little bit about the equity requirements for the capital plan at this point? I mean, its understand, it looks a little higher than original expectations for this year, but a little bit lower next year. But there is higher capital. So you would expect some changes there. I just wondering if you could maybe comment on how financing will go forward with a $600 million plus annual capital program?

Yep. This is Rich, Mike. Yes. you hit it head on for the first two years. We did increase capital from what we previously disclosed for 2020. We actually came in higher for last year than what we disclosed at the end of the third quarter. Mainly, weather was pretty favorable, so we were able to spend some extra capital in the fourth quarter. And then increase this year is a bit too. So between those that's what explains the slight uptick in this year's equity issuance plan. And then next year's is the new guidance for next year should be generally in line with what we've talked about before given the incremental capital. When you think about after 2022, we're a couple years away from that. So we'll see. If I had to guess today, based on a $600 million annual CapEx in 2023 through 2025, I would say, we probably need to issue $30 million to $40 million of equity each year. And then if there is incremental capital above the $600 million, you can continue to think about that $0.25 to $0.30 on the dollar that we've talked about before for each capital dollar. But we'll see how we manage delivering the balance sheet over the next couple years. It's possible. We may not need equity in those years, if we're in that $600 million range, we'll see.

I guess, I would also add. This is Linn. I had the -- we're very focused on O&M management and of course making sure that our capital that we do spend is quality capital, getting good returns on that. So we have some time to manage in the 2022.

And when you guys are thinking about the incremental projects to the base capital plan, are we still talking about the same thing, roughly one or two projects a year to be announced sometime during the year and that $50 million to $100 million ranch each one?

Mike. Sorry to interrupt you, Mike. Yes. This is Lynn. Yes. That's how we see it. The same kind of projects we've been doing in the past. The things that we're good at and our sweet spot. We have opportunities with gas transmission distribution or programmatic spending. We have opportunities, we think on transmission and as we work through the IRPs in South Dakota and Wyoming and ERP in Colorado, as we work through those the next year, year and a half, roughly, that we'll file our South Dakota and Wyoming. We'll complete our South Dakota and Wyoming IRPs next to this summer. And then next year, we're working on the Colorado. We think that might generate some opportunities for us. Of course, we're watching the goals that come out of Washington D.C. with executive orders, et cetera, and how aggressive those are. We think there could be some good opportunity for us as well.

And could you comment a little bit about rate case activity going forward? With the Nebraska case, settlement approved? Maybe comment a little bit about the process in Colorado at this point?

Sure. I guess, I'll start with your first party question with kind of what's our schedule. We've reached out and worked with our Iowa regulators and our Kansas regulators. They both anticipate that we'll file a case around the midyear this year in those two states; Iowa gas and Kansas gas. We've talked about Arkansas gas in previous calls. So I think I'll address that too. We continue to analyze that. We're seeing good growth, good customer usage. So we're watching when we think we might need to file in Arkansas, watching that closely. Interested in formulaic rates there. We're watching how that's -- how other companies are treated in Arkansas with respect to that as we make those decisions. And then finally, addressing Colorado gas. We were of course disappointed that the Colorado Commission did recently, early in the year dismiss our rate review that we had filed there. We have requested RRR, an opportunity for rehearing, re-argument and reconsideration. And the Commission should decide on that by the end of this month. Once we know their path there or how they decide that. Should they deny or continue to dismiss our case. I guess we have two avenues in front of us. At that point one avenue is to appeal that case to District Court or to a court to State Court in Colorado. The other would be to refile the case. We've been working very constructively with the staff and the Office of Consumer Counsel. In that case, we're highly disappointed that it was dismissed. We don't think that was legal grounds for the dismissal. So we've asked the Commission to reconsider that. And then I just lay down to our avenues after that. But we're hopeful that in best case scenario they'll reinstate that case and we begin to move it forward. But otherwise, we'll certainly think about whether we need to appeal or whether or not, we should file a new case. Also, the SSIR, sorry to interrupt you Mike. But the SSIR, we have a system safety and integrity rider before the Commission that is still in place. So that's good news for us there. We hope to have that decision by mid year there.

Right. I mean, I think in the past, you've described Colorado as an improving regulatory situation, especially after the Pueblo vote [ph]. Is this a setback in that overall process of trying to improve the relationships with the governor, legislators and the commission itself? Or do you think it's a major setback or a minor one?

Well, we plan for it to be minor. We hope that it's minor. We take the relationships extremely seriously. We have a relatively new commission. We have one commissioner has been there a couple of years. The other two are essentially new. So we're working very hard around that. We have -- as we've announced in the past realigned our leadership around Colorado, working very hard on those relationships. And we think we are seeing progress. The denial, the dismissal of that case was done before one Commissioner left the commission and now been replaced. So we think that's another opportunity for us to continue to foster that relationship and continue really focus on it carefully. So we have strategies we are executing. We put leadership around it, and we continue to do that. And we're in Colorado for the long term. So that's what we're focused on. There's that long term good relationship.

Great. I'll pass it on to the next person now. Thank you.

Thank you, Mike.

Thank you. Our next question comes from the line of Julien Dumoulin-Smith from Bank of America. Your line is now open.

Hey, good morning team. Congratulations on all of the updates here.

Good morning.

Absolutely. Perhaps if I can to try to clarify the long term outlook of five to seven here. I know you dutifully call that it's off the 22 baseline. How do you think about the 2.7 versus the $3 billion in CapEx? And where each of those numbers respectively puts you within that trajectory? I just want to understand what that 2.7 basis. Is that a midpoint? Or how do you think about it?

I'll take the first swing at that, and Linn can fill in the blanks. Julien, as Linn said in his comments, we fully expect to spend at least $600 million a year. So you should think of $3 billion is -- even though our materials detail, the $2.7 billion base, you should think more in terms of $3 billion. And for the incremental amount in terms of what's rider and what's growth that incremental spend, you can kind of put it in the same ratios that we have for our $2.7 billion base in terms of the details that are in the appendix. But we fully expect to spend at least $3 billion over the next five years. So that's really our plan.

I think Rich said that nicely. And our growth plan isn't just based on capital spin. We have other levers that we're working hard on. We have growth is less capital intensive, such as serving the data centers that we serve the technology loads that we are seeing growing within our service territories, and things of that nature, Julien. And we also have, the lever on O&M savings, we're focused on that. How we continue to reduce our cost to serve. So that's something that look focused on to help us continue to reach that 5% to 7% target that we put out there.

I think one other thing to add to that is the trend that we've seen since COVID started. We had good population growth in many of our service territories, even prior to COVID. But we've seen an uptick during 2020 and into 2021. That does not appear to be slowing down. So as we look forward, we think we're going to have some nice opportunity there for real strong growth in much of our service territory with urban flight, if you want to call it that, that we're seeing into our territories.

Right. But just to clarify this, guys, apology. And there may not be a direct answer here. The $3 billion, right again, you say you fully expect that? Does that reconcile with the midpoint of that 5% to 7% at the outset? And maybe you don't want to be that specific, because you're saying that there's a few other sales related factors that disintermediate that relationship. But I just want to make sure I'm hearing you right.

That is exactly the way to characterize it, Julien. It's just not completely tied to. The 5% to 7% is not entirely tied to capital. There's a lot of other things we have going on that are going to help us get there. Certainly the capitals are the primary driver, but there are plenty of other factors that play.

Got it? All right, excellent. If I can, if you permit me. On the incremental capital conversation here beyond the $3 billion, right? You give us here from 2.7 to 3, now I'm asking beyond. How do you think about that iteration in your planning? And how tied is that to some of the IRP planning that you guys talked about just now on the call, as well as some of these prior GHG emission targets you guys delineated late last year?

Well, certainly the IRP for South Dakota and Wyoming and the ERP for Colorado, could provide some nice incremental opportunity when you're thinking even beyond this five-year plan, Julien. And some of it could fall within this five-year plan. But if you think even longer term, there could be some tremendous opportunity there. There are lumpy projects we're looking at in both the electric and gas utilities that I think could thrust us well above that $3 billion. As Linn mentioned, also our programmatic spend, we continue to look at and refine that, that'll just be an ongoing process. So I would expect uptick in that programmatic spend, primarily at the gas utilities, but certainly within the electric utilities too. So there are a number of avenues where we can get north of that $3 billion over these five years. And then when you think longer term, there are some really strong opportunities.

Got it? All right, excellent. So but maybe the point is, the IRP updates don't necessarily relate to the current five-year outlook. That really is backfilling opportunities beyond the timeframe we're talking about for the most part [ph]?

That is correct, Julien, yes.

Excellent. All right. Thank you guys. I'll leave it there.

Thank you

Thank you. Our next question comes from the line of Andrew Weisel from Scotiabank. Your line is now open.

Thank you. Good morning, everyone.

Good morning, Andrew.

My first question is on rate base growth. You've historically grown to that 8.5% the last five years. What's the outlook as far as where you've given the CapEx and depreciation. But how does that factor into a rate base growth outlook? And then relative to the 5% to 7% EPS growth outlook is the delta going to be related to equity needs or other factors? I heard you talk about population migration and account growth, maybe other things like earned ROEs or cost cuts? Whatever may explain that delta, if you could help detail that please?

I guess, Andrew, this is Rich. We did not give a rate base growth target. We just jumped right through that straight to an EPS growth target. I think you can project our depreciation and use that $3 billion type curve and come up with what a rate base growth rate looks like. Certainly it's -- as you get out to the back end of that curve on the five years and beyond, I think you're going to see additional CapEx opportunities that will help that rate base growth remain strong. But it's really the combination of rate base growth, as I just described to Julien's question plus these other opportunities that are going to get us there.

Okay. Fair enough. Next question on the dividend growth. You got the 5% plus? My question is that plus a function of the pace of EPS growth? Or does it also depend on factors like the balance sheet and cash flow and share count?

All of the above for both.

Okay. Maybe I'll ask it this way.

Its generally -- It's going to generally be in line or slightly less, I would say than what are earnings growth are. But with the 5% to 7% EPS long term growth target, we would expect that dividend grow at least to 5%.

Okay. Then the big picture question. I know you're asked this quite a lot. But can you share your latest thinking on the long term risks of owning gas utilities? Obviously, we're seeing increased pushback even from what previously was high level. But environmentalist, politicians and even investors are now asking more questions about that. So how do you think about the long term outlook for LDCs in general and yours specifically?

We feel pretty confident about our LDCs, Andrew. Our territories are primarily very cold climates. Right now where we're sitting is well below zero. We're having quite a cold spell right now across our territories. And a good example, where, as I've heard you say that in the past yourself, you'll be lethal without natural gas in some of the places that we currently serve, or heat pumps and things of that nature just simply aren't efficient enough to keep up. So we've not had any bands within our service territories. We are certainly aware of conversations going on. We have a highly engaged team executing a strategy with our outreach programs within those communities, within our legislators. We're also partnering with industry associations like the AGA, and we're very much partnered as utilities across our service territory, working together to ensure that our communities especially community leaders, and thought leaders understand the real value and frankly, the necessity of natural gas and what it brings to the table. And of course, what we as Black Hills Energy do within those communities as well. So we're highly engaged executing that strategy and watching that very closely. But we were very strong with the future of LDCs within our portfolio.

Sounds good. Thank you. Stay warm out there and appreciate the additional financial disclosures.

Thank you, Andrew.

Thanks, Andrew.

Thank you. [Operator Instructions] Our next question comes from the line of Brandon Lee from Mizuho. Your line is now open.

Hey, good morning. Hope you're staying warm out there?

Working hard, Brandon.

Just a quick question. So what's your current level of structural under earnings and how much of that gap can you offset?

Well, the way I would answer that is certainly you kind of have to look jurisdiction by jurisdiction, Brandon. If we are under earning, that's where we're going in for a rate review. Linn, kind of gave some details in his answer just a moment ago about what states we're looking at. In our other states, we're earning solid returns or taking actions from a cost perspective, or how we deploy capital to make sure that we are earning an appropriate return. That's kind of the short version of that, I think.

Okay. And then, I guess another question is, what do you expect in your various customer classes, residential, commercial and industrial in 2021 versus 2020. I guess, just because I think a lot of your service territories kind of stayed open throughout the year, as opposed to maybe the coastal service charges [ph]?

If you look at -- Brandon, if you look at slide 35 in the deck, and that details are COVID impacts, you're going to see that our load impacts really were not substantial at all, and total about a $1.5 million. Due to the fact like you said, we've generally stayed open in our territory. The bigger impacts were sequestration costs that we are no longer incurring, waived late fees that for the most part we're no longer incurring. And then, we accrued an extra $3.3 million of bad debt last year for COVID related items. And that's generally done to all of our states, allowed us to begin the disconnect process a few months back with the exception of Arkansas. That's our only state that continues into May. But we've managed that quite well. I think a lot of our customers have gone on to payment plans and we've seen our arrearages come down almost to normal levels by the end of January -- end of December and end of January. So we've worked our way through that. But back to your original question, load impacts in 2021 compared to 2020, we just didn't have material load impacts from COVID in 2020. So obviously, we should pick a little backup we believe, but it's not a huge mover.

Now, we're about halfway, Brandon, through our heating season. Our first heating season experiencing the pandemic. And I'd say, we look at our gas loads if the impact has been what we call immaterial. So looks pretty good, actually.

Great. That's very helpful. Thanks for your time.

Thank you.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Linn Evans for closing remarks.

Well, thank you, Gigi. Thank you, everyone, for joining us today. I'm really excited about our future. We're in a great position strategically. We're in a great position financially. I'm very confident our team's execution. Our team is very focused, doing a great job, especially through the pandemic. Our ability to deliver the long term earnings outlook and our ESG goals which is very bright. And we're excited about the opportunities we have across our growing service territory as we see more customers move into our territories. And as we seek results for you, the shareholder and for all of our stakeholders. So thank you very much for your interest in Black Hills today. Have a safe, healthy and enjoyable day. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank for participating. You may now disconnect.