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Text: blackhillscorp.com, under the Investor Relations heading.
Before we begin today, we would like to note that Black Hills will be attending the EEI Financial Conference starting November 7 in Hollywood, Florida.
Materials for our investor meetings will be posted on our website prior to the start of the conference.
Leading our quarterly discussion today are Lin Evans, President and Chief Executive Officer; and Rich Kinzley, Senior Vice President and Financial Officer.
Although we believe that our expectations and beliefs are based on reasonable assumptions, actual results may differ materially.
I'll begin on Slide 4.
But before I discuss our key achievements for the third quarter, I'd like to start by recognizing our dedicated Black Hills team.
Working together, we delivered strong operational and financial results, and we serve record peak customer loads, and we delivered quarter-over-quarter earnings that were up 21% compared to last year.
We have a great team, and I value and appreciate them very much.
Our Board recently approved a 5.3% increase in our dividend, achieving 51 consecutive years of dividend increases.
This represents one of the longest streaks in our industry.
And naturally, we're quite proud of this accomplishment and the growth that it reflects.
We also made excellent progress on our regulatory initiatives, including our three rate reviews and Winter Storm Uri cost recovery.
And finally on this slide, early in the quarter, we published our updated and our comprehensive corporate sustainability report, along with our new and expanded ESG disclosures.
We continue to make solid strides communicating our sustainability focus, including our achievements and our goals for the future.
Slide 5 lays out our financial outlook.
Given our success in delivering strong operational, financial and regulatory performance in the second and third quarters, we're increasing the lower end of our 2021 earnings guidance range by $0.05 per share.
We're also maintaining our 2022 earnings guidance range, and we continue to target a 5% to 7% average earnings growth for 2023 through 2025, and at least 5% annual dividend growth.
Slide 6 lays out our regulatory progress with a focus on regulatory rate reviews, our investment rider requests and Winter Storm Uri cost recovery.
We've made good progress on our regulatory strategies this year, achieving constructive and productive outcomes.
We've reached a unanimous settlement agreement with all parties for our Colorado natural gas rate review that will provide $6.5 million in new annual revenue.
We anticipate new rates being effective January 1, 2022, pending final approval of the settlement.
We also received approval for a new three-year system safety and integrity rider, which is a critical mechanism to help us provide ongoing safe and reliable service to our Colorado gas customers for years to come.
In Kansas, we also reached a unanimous settlement agreement for our rate review, which includes the renewal of our five-year safety focused capital investment rider.
The settlement benefits customers through a net neutral base rate impact.
In addition, we're pleased that the settlement provides federal and state tax reform benefits to customers, a timely benefit for our Kansas customers given current high natural gas commodity prices.
In Iowa, we're working through the regulatory process and hope to achieve a resolution by year-end, with final rates effective in the first quarter of 2022.
Shifting to our Winter Storm Uri cost recovery process.
We filed our recovery plans in all states by the second quarter.
We've already obtained approvals for Nebraska Gas and South Dakota Electric, and we're collecting interim rates for Arkansas, Iowa and Wyoming gas.
At Wyoming Electric, Uri related costs will flow through their normal cost adjustment mechanism.
We also recently received a positive settlement for Wyoming Gas and we're currently engaged in settlement discussions for Kansas Gas.
We expect to complete our Uri cost recovery filings either during the fourth quarter or in the first quarter of next year, and we remain confident we will recover the costs submitted in our applications.
Looking forward, we're preparing for our next rate reviews for Arkansas Gas and Wyoming Electric.
We're planning to file a rate review for Arkansas gas late this year.
For Wyoming Electric, we'll file by midyear 2022, as required by a prior settlement agreement from several years ago.
Moving to Slide 7.
To enable continuing growth in Wyoming, we're excited to announce a 285-mile electric transmission expansion project that we're calling, Ready Wyoming.
As proposed, the project will provide many benefits for our customers.
Among those benefits are enhancing resiliency through further interconnection of our Wyoming and South Dakota electric systems, expanding access to existing third-party transmission systems and providing access to new energy markets and additional renewable resources.
Importantly, the project will also increase overall transmission capacity, allowing us to serve the growing Cheyenne community.
The project's expanded access and capacity will allow us to better serve growth in technology businesses like data centers and blockchain and crypto miners, which I'll discuss in more detail in a later slide.
The project will also enable and benefit renewable energy expansion both through expanded access for existing renewable resources and for new wind and solar projects in the Cheyenne region.
We're working toward filing for approval of the project in the first quarter of 2022.
And following approval, we plan to construct the project in several phases or segments spanning 2023 through 2025.
Moving to Slide 8.
We have refreshed and increased our 2021 through 2025 capital investment program by $149 million, to a total of $3.2 billion.
In doing so, we firmed up nearly $300 million in projects that were placeholders in last quarter's forecast.
This $3.2 billion forecast includes incremental investment for the Ready Wyoming project.
This is a robust plan, and there are certain other investment opportunities we're aggressively pursuing, including other potential transmission projects and what we call capital-light growth opportunities that may arise.
I'll note that our current base capital forecast does not include potential transmission or renewable generation assets that may derive from our South Dakota and Wyoming Integrated Resource Plan or from our clean energy plan to be filed in Colorado next year.
To help evaluate additional opportunities to lower cost for customers, we joined several other utilities in the Western U.S. to form the Western Markets Exploratory Group.
This group will explore the potential for developing an organized wholesale market in the Western interconnect while also reviewing transmission expansion opportunities and other possible grid solutions.
In Cheyenne, we continue to experience strong load growth, including growth from data centers and related businesses.
For perspective, the peak demand day for Wyoming Electric increased from 192 megawatts in 2014 to 274 megawatts this past summer.
That's a 43% increase during that period.
With our entrepreneurial approach, combined with our Ready Wyoming transmission project, we're optimistic about recruiting more technology-oriented businesses into Cheyenne and Wyoming.
As an example, this summer, our growth team received numerous request to serve crypto mining businesses.
You may recall Wyoming was an early leader in passing legislation to support blockchain and crypto mining business and we already have an approved block chain interruptible service tariff in place.
In response to the multitude of crypto mining inquiries, we issued a reverse request for proposals in August.
That RFP results in a very robust response.
We recently narrowed the bidders list and we've selected finalist for contract negotiations.
We also continue to be very optimistic about ongoing population migration into our service territories.
Both our electric and gas utility service territories are seeing accelerating customer growth, and we continue to witness ongoing customer growth trends.
Finally, we demonstrated our discipline throughout the pandemic and after Winter Storm Uri to manage costs, and we're also fostering ongoing sustainable cost savings through innovation and continuous improvement.
You'll hear more about these efforts in the near future as we discuss our companywide Energy Forward program.
Moving to Slide 9.
We're fully engaged on sustainability for our communities.
We made significant progress toward our carbon intensity reduction goals listed on this slide.
In 2020, we already achieved a 30% reduction at our electric operations and a 33% reduction in our gas utility since 2005.
Our forward emission goals are not based on aggressive assumptions or technology that doesn't currently exist.
Our Midwest culture is to be true to our word and we have published goals that we expect to meet or exceed based on existing assets and current technologies because our goals are reliant upon current technology.
There's potential upside for acceleration in our carbon reduction goals.
As technologies advance and as cost decline for renewables and battery storage, we're confident in our emissions goals.
We're also watching technologies for potentially reducing carbon emissions from our existing plants, which could accelerate achieving our emission goals.
One of our defined steps to meet our 40% reduction goal by 2030 within our electric operations will be the conversion of our Neil Simpson II coal-fired power plant to natural gas.
We'll also add renewable generation and battery storage resources to achieve our emissions goals.
For our natural gas utility, we expect to reach to 50% reduction by 2035.
We'll do that through continued pipeline replacement programs and additional emission reduction strategy such as damage prevention, expanding leak detection and energy efficiency.
We're adopting process improvements such as vacuum technology for gas system blowdowns.
We're also integrating more renewable natural gas in our system with several projects already in service and many more in development, and we voluntarily committed to reduce methane emissions through our participation in the EPA methane challenge and the One Future Coalition.
Looking to the future, we're supporting research to advance emissions reduction technologies.
We're participating in a feasibility study to test the viability of using hydrogen and natural gas generation at our Cheyenne Prairie Generating Station.
We're also supporting the University of Wyoming's research program for turbine firing technologies that would further reduce emissions.
We've invested alongside our peers at our carbon capture research project and other emerging clean energy technologies.
Our goal in fostering innovation is to find more efficient and affordable ways to deliver energy with lower emissions, which will benefit our communities and our stakeholders.
I encourage you to visit the sustainability link on our investor website to read more about our sustainability progress and our commitments.
In August, we published SASB and NGSI disclosures as well as our 2020 sustainability reports and other refreshed and more comprehensive disclosures.
Slide 10 has a graphic that shows the decarbonizing trends in our generation fleet.
We've been upgrading our fleet for nearly a decade, beginning with the retirement of 123 megawatts of four older coal-fired power plants in 2013 and 2014.
Since that time, we've added 282 megawatts of owned wind generation and another 132 megawatts of wind energy through power purchase agreements with a number of other renewable projects in flight.
Looking forward, and as I stated previously, we already announced that the Neil Simpson II coal-fired power plant will be converted to natural gas in 2025.
The remainder of the time line shows how we expect to meet carbon reduction goals by converting or replacing the remaining coal-fired power plants over the next two decades.
This time line could very easily be influenced by generation and emission technology advances and cost declines.
In our cold weather geography, having immediately reliable, and dispatchable generation capacity is an absolute must.
As we demonstrated during Winter Storm Uri, we experienced no outages.
Slide 11 lists recent achievements by our team.
I'm pleased with our team's engaged mindset toward continuously improving our operations, especially in regard to safety, reliability and the customer experience in our workplace culture.
Our dedicated team at Cheyenne Prairie Generating Station was recently awarded OSHA's highest worksite safety recognition Star status.
This recognition is no simple task.
It required a multiyear rigorous audit and approval process to be recognized as a leader in the prevention of hazards and a focus on continuous improvement of safety and health management systems.
I'm happy to note this is our second time achieving this recognition with the Cheyenne Prairie team, joining the Pueblo Airport Generating Station team in Colorado as OSHA recognized industry leaders in safety.
We're also industry leaders in reliability with all three of our electric utilities recently listed in the upper half of the top quartile for reliability, as measured by SAIDI.
This remarkable achievement reflects years of diligent effort by our team and executing our customer-focused operations and investment strategy.
We also continue to improve our customer experience, achieving a J.D. Power ranking of second overall by our gas utility in the South region.
Also, our year-to-date Net Promoter Score through mid-October was approximately 64, an improvement from 60 in 2020 and notable improvement from a score of 42 four years ago.
I already mentioned our great workplace and engaged team.
I'm pleased to report we were named for the second consecutive year to Achievers 50 Most Engaged Workplaces.
We survey our employees about every 18 months to understand how we're doing and how we can improve as a team.
This anonymous survey is conducted by a third party and returned strong scores as compared to our industry, especially in regard to safety, company values and management effectiveness.
Finally, on this slide, we were named a Veteran-Friendly Employer of the Year at Wyoming's 2021 Safety and Workforce Summit.
Slide 13 summarizes earnings per share for the third quarter.
We delivered earnings per share of $0.70 compared to $0.58 in Q3 2020, a 21% increase.
Positive financial results were driven by new rates, strong customer growth and usage and mark-to-market gains.
On a consolidated basis, weather was not a major driver of earnings compared to normal, but was unfavorable compared to Q3 2020, which experienced a $0.05 benefit compared to normal.
Slide 14 illustrates the detailed drivers of change in net income quarter-over-quarter.
All amounts listed on this slide are after tax.
The main drivers compared to last year were $1.5 million of gross margin improvement from new rates and riders, $2.8 million of increased margin from customer growth and higher usage per customer, especially in our electric utilities, and $4.8 million mark-to-market gains for both wholesale energy and natural gas commodity contracts.
We continue to manage O&M closely with a minimal quarter-over-quarter increase.
DD&A increased as a result of our capital investment program and interest expense increased as a result of higher debt balances mainly due to the impact from Winter Storm Uri.
The improvement in other income expense over the prior year was driven by lower benefit costs, market impacts of nonqualified deferred compensation expense and benefits from company-owned life insurance.
Slide 15 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 September, we had more than $500 million of available liquidity on our revolving credit facility.
In July, we amended and extended our revolving credit facility with similar terms through July 2026.
And in August, we issued $600 million of notes due in 2024.
Proceeds from the notes were used to repay our term loan balance and other short-term indebtedness.
The new notes are repayable after six months, providing flexibility to pay down proportionately alongside increased cash flows from Winter Storm Uri cost recovery plans.
The weighted average length of recovery we requested in our regulatory plans is 3.7 years.
New debt and deferred recovery of fuel cost for Winter Storm Uri temporarily increased our debt to total capitalization ratio to 62% at the end of March, and it remained at that level through the end of September.
As we recover storm costs, repay debt and execute on our equity offering program, we expect to reduce our debt to total capitalization ratio.
We continue to target a debt to total cap ratio in the mid-50s within the next two to three years.
During the third quarter, we issued $23 million through our at-the-market equity offering program for a total of $63 million year-to-date.
We expect to issue a total of $100 million to $120 million in both 2021 and 2022.
The increase in 2022 compared to what we previously disclosed is mainly related to the increases in our capital forecast.
Moving on to our dividend on Slide 16.
Last week, we delivered on our dividend growth target with our Board approving a 5.3% increase in our quarterly dividend.
For 2021, the quarterly dividend achieved 51 consecutive years of dividend increases, one of the longest track records in our industry and a record we're quite proud of.
Over the last five years, we have increased our dividend at an average annual rate of 6.4%, and we anticipate increasing our dividend by more than 5% annually through 2025, while maintaining our 50% to 60% payout ratio.
We're pleased with how our team responded in the second and third quarters and meeting our financial objectives and overcoming the challenges presented by Winter Storm Uri.
We've made excellent progress on our regulatory activities, increased and clarified our capital investment program and enhanced our ESG disclosures.
Once again, we've shown our ability and agility to continue delivering solid financial results and strategic progress.

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