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Text: blackhillscorp.com under the Investor Relations heading.
Leading our quarterly earnings discussion today are Lin Evans, President and Chief Executive Officer; and Rich Kinzley, Senior Vice President and Chief Financial Officer.
Although we believe that our expectations and beliefs are based on reasonable assumptions, actual results may differ materially.
Ill begin on slide four, which lists our key achievements during the second quarter.
Our team delivered strong financial results, with earnings up 21% compared to last year.
We also delivered solid operational performance with strong execution of our capital plan, and we made excellent progress on our regulatory initiatives, including Storm Uri expense recovery actions.
After safety, one of our key operational priorities is providing reliable and resilient service to our customers.
During the record-breaking heat in June across the Western United States, the Black Hills team and our electric systems and generating fleet performed exceptionally well.
This was our second consecutive quarter that included extreme weather events, and our energy delivery systems performed as designed.
During both quarters, our diverse mix of power generation resources and our reliable and dispatchable generation capacity allowed us to serve customers and avoid rolling blackouts and other emergency actions that were required in other parts of the country.
The Black Hills team continued to execute our capital investment plan to maintain our enviable reliability and system resiliency and to serve our growing communities.
Were on track to deploy up to $647 million of capital for the year, and we continue to evaluate and develop new opportunities beyond 2021.
On the regulatory front, we had a very productive quarter.
As we said we would do, we filed rate reviews in Colorado, Iowa and Kansas.
In Colorado, we recently received approval for a new safety-focused investment rider for our gas utility.
And on June 30, we submitted our electric integrated resource plan for our South Dakota and Wyoming utilities in a moment, and then Rich will cover regulatory activity in more detail in his update.
Slide five lays out our financial outlook.
We affirmed our 2021 earnings guidance based on strong second quarter financial performance.
We also maintain our 2022 earnings guidance range.
We are targeting 5% to 7% earnings growth for 2023 through 2025 and at least 5% annual dividend growth.
Our growth plan is shown on slide six.
We continue to plan for capital investments of more than $3 billion through 2025.
We expect earnings growth to be driven by our robust capital plan to serve customers, incremental project opportunities and other earnings drivers that add margin with little or no capital investment.
In our electric utilities business, we are evaluating our transmission needs to develop expanded access to power markets and to cost-effectively serve loads across our electric utilities.
We also see opportunity to serve growing load in our prime data center market in Cheyenne, Wyoming.
We look forward to engaging our regulators regarding these potential transmission opportunities.
Our initial modeling leads us to believe interconnecting our three electric systems and expanding power market access would benefit our customers and shareholders while also supporting our long-term emissions reduction goals.
In addition, were exploring the potential for responsibly adding more renewable generation and pursuing additional renewable natural gas projects across our agriculture-heavy service territories.
We currently have a long list of potential renewable natural gas interconnect projects, and while our existing RNG business is relatively modest, RNG represents an interesting sustainability and perhaps longer-term financial opportunity.
Were very optimistic about population migration into our service territories.
Both our electric and gas utility service territories are seeing accelerating customer growth, and we continue to see evidence of firming customer growth trends.
Finally, were advancing our culture to be better every day through cultivating innovative solutions and leveraging technologies and data analytics as we encourage our team to find ways to serve our customers with more efficient and effective processes.
Moving to slide seven.
As I said earlier, on June 30, we submitted our integrated resource plan for our electric systems in South Dakota and Wyoming.
The resource plan modeled a variety of scenarios with the objective of accomplishing four goals: first, serve our growing customer demand for electricity; second, utilize resources that are cost-effective; third, maintain strong reliability; and finally, achieve our environmental goals as set forth in our ESG initiatives.
Our preferred plan proposes to add 100 megawatts of new renewable generation, evaluate the addition of up to 20 megawatts of battery storage to help maintain reliability, and evaluate and develop new transmission opportunities.
In addition, the plan proposes to convert our 90-megawatt Neil Simpson II coal-fired power plant to natural gas in 2025, the end of its engineered life.
This option helps provide system resiliency, demonstrates our continued support of a locally based energy economy and supports our emission reduction goals.
In addition to our resource plan, were supporting research to advance emissions-reducing technologies.
The funding for a feasibility study for a hydrogen pilot project we proposed was recently approved by the Wyoming Energy Authority and the University of Wyoming Energy Research Council.
The feasibility study will examine the viability of using hydrogen and natural gas generation.
Were also supporting the University of Wyomings research program for turbine firing technologies that would further reduce emissions.
As these technologies advance, future options for our generation resources will only continue to expand and, in turn, allow us to continue to cost-effectively and responsibly reduce our emissions.
Specifics about the pilot project and the associated capital necessary to execute our recently submitted resource plan are still in the early stages of evaluation.
As we work with regulators through the review of the resource plan and gain greater clarity on project specifics, we will provide estimates on potential incremental additions to our capital plan.
Any new generation investment would be incremental to our current capital plan.
We have included some transmission investment in our existing capital forecast, but there may be incremental opportunities.
Moving to slide eight.
We continue to make progress from an Environmental, Social and Governance, or ESG perspective.
Were taking a responsible approach to reducing our emissions, with goals to reduce emissions intensity for our electric operations of 40% by 2030 and 70% by 2040 off a 2005 baseline.
For our gas utilities, were targeting a 50% reduction by 2035 and have voluntarily committed to reducing methane emissions with our participation in the EPA Methane Challenge and the One Future Coalition.
We have a legacy of prioritizing ESG issues, and were working to holistically communicate that story as we continually enhance our disclosures.
During August, we will publish new disclosures for the Sustainability Accounting Standards Board and the Natural Gas Sustainability Initiative.
We will also soon publish our 2020 Corporate Sustainability Report and updated AGA and EEI quantitative reports.
I encourage you to visit our Investor website and review these materials once they are published.
And finally, on slide nine, were well-positioned as an integrated utility with a strong long-term growth outlook.
Were executing our customer-focused strategy and are confident in our future.
slide 11 summarizes earnings per share for the second quarter.
We delivered earnings per share as adjusted of $0.40 compared to $0.33 in Q2 2020, a 21% increase.
Overall, strong financial results were driven by new rates and rider revenues and recovery of wholesale power margins at our utilities.
Higher gross margins were partially offset by increases in O&M, DD&A and interest expense.
Weather was not a major driver of earnings during the non-peak second quarter for both our electric and gas utilities.
The net benefit to earnings from weather was $0.01 per share compared to normal and $0.01 below the second quarter last year.
Slide 12 illustrates the detailed drivers of change in net income quarter-over-quarter.
All amounts listed on this slide are after tax.
As I noted on the previous slide, the main drivers compared to last year were $9.2 million of gross margin improvement from new rates and riders and recovery of wholesale power margins at our utilities.
O&M increased due to higher employee costs and outside services, planned power plant maintenance-related expenses and operating expenses for new wind generation.
The improvement in other income expense over the prior year was driven by lower retirement benefit service costs and market impacts on nonqualified deferred compensation expense.
The additional quarter-over-quarter tax benefits of $4.3 million on the far right of the slide were primarily from two items: first, Nebraska Tax Cuts and Jobs Act customer bill credits, which reduced gross margins collected from customers and reduced income tax expense by the same amount; and second, increased flow-through tax benefits related to repairs and certain indirect costs.
As we promised last quarter, we made progress on mitigating Winter Storm Uris impact on earnings.
The first quarter net impact from Storm Uri was $12.5 million, or $0.15 per share.
As we told you then, we planned to offset approximately $0.05 of these costs through regulatory actions and ongoing power marketing opportunities.
We delivered $0.03 of the offsets in the second quarter, and we anticipate achieving the other $0.02 through the remainder of the year.
And we are on plan to mitigate the remaining $0.10 net storm year impact through O&M management and other opportunities.
Slide 13 shows the details of our recent regulatory activity.
In Kansas, we filed our first rate review in more than seven years, including a request to renew our existing 5-year system safety and integrity investment rider.
In Iowa, we filed our first rate review in more than a decade, including a request for a new system safety and integrity investment rider.
And Ill note that Iowa interim rates took effect in June.
And we continue to make progress on our rate review filed for Colorado Gas.
We expect all three of these rate reviews to conclude late this year or early next year, with new rates effective in Q1 2022.
Looking forward, we are tentatively planning to submit rate reviews for Arkansas Gas in the fourth quarter of this year and for Wyoming Electric in mid-2022.
And as previously noted, we are making progress on our Storm Uri recovery plans.
All our recovery applications have been filed, and we already received final approval and commenced recovery in Nebraska and South Dakota, with interim rates in place in Arkansas and Iowa.
Slide 14 shows our financial position through the lens of capital structure, credit ratings and financial flexibility.
We have a manageable debt maturity profile and are committed to maintaining our solid investment-grade credit ratings.
At the end of June, we had more than $500 million of available liquidity on our revolving credit facility.
And in July, we amended and extended our revolving credit facility with similar terms through July 2026.
We expect to finalize our refinancing strategy for the $600 million balance on our term loan in the third quarter.
We are evaluating refinancing options that align with our anticipated recovery period.
The weighted average length of recovery requested in our regulatory plans is 3.7 years.
New debt and deferred recovery of fuel costs for Storm Uri temporarily increased our debt to total capitalization ratio to 62% at the end of March, and it remained at that level at the end of June.
As we recover storm costs, repay debt and execute on our equity program, we expect to reduce our debt to total capitalization ratio, and we continue to target debt to total cap ratio in the mid-50s.
During the second quarter, we issued $40 million through our at-the-market equity offering program.
Our equity issuance expectations are still $100 million to $120 million for 2021 and $60 million to $80 million for 2022.
Moving to our dividend on slide 15.
In 2020, we proudly marked 50 consecutive years of annual dividend increases, one of the longest track records in our industry.
Since 2016, weve increased our dividend at an average annual rate of 6.6%.
And looking forward, we anticipate increasing our dividend by more than 5% annually through 2025 while maintaining our 50% to 60% payout target.
Were pleased with our strong second quarter financial results and the progress we made during the quarter on many fronts.
Were excited about our growth opportunities, with accelerating population migration into our service territories and many opportunities to continue to develop our strong capital program.
We continue to be well-positioned, both operationally and financially, to be ready to serve all our stakeholders.

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compname reports qtrly gaap earnings per share $0.40.
black hills corp qtrly gaap earnings per share $0.40.

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