Black Hills Corporation
Q2 2017 Earnings Call Transcript

Published: 4 Aug 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Black Hills Corporation Second Quarter 2017 Earnings Conference Call. My name is Jonathan 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 will now like to turn the presentation over to Mr. Jerome Nichols, Director of Investor Relations of Black Hills Corporation. Please proceed, sir.

[Jerome Nichols:]

Thank you, Jonathan. Good morning everyone, welcome to Black Hills Corporation's second quarter 2017 earnings conference call. Leading our quarterly earnings discussion today are David Emery, Chairman 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, 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 David Emery.

[David Emery:]

Thank you Jerome, good morning everyone, thanks for joining us this morning. I’ll start the discussion on Slide 3 of the webcast deck for those of you following along. Similar to prior quarters I’ll give an update on the second quarter, Richard Kinzley, our CFO will provide a financial update for the quarter and then I’ll talk a little bit about forward strategy before we take questions and answers. Starting with slide 5, we had a good second quarter, $0.02 increase in earnings per share as adjusted compared to the prior year which was in line with our expectations. We also continue to advance several of our key utility growth projects during the quarter. Second quarter highlights for our utilities included a peek at our Wyoming electric utility which was set right after quarter end in July surpassing the previous peak by a fair amount. We continue to grow our shine pretty strongly. On June 23, our Colorado electric utility issued a request for proposals to add 60 megawatts of renewable energy resources by 2019 in order to meet the states renewable energy requirements. Bids from the RFP are due on the 4 August and then we intend to select the winning project and recommend that to the Colorado PUC prior to year end. Our South Dakota electric utility entered an agreement with the South Dakota PUC staff which was approved by the commission itself on June 16 and that agreement secures the benefits of Service Gas acquisition and successful integration for South Dakota electric customers and our shareholders for the next six years. On May 30, our South Dakota electric utility completed the final segment of our 144 mile electric transmission line from Northeastern Wyoming to Rapid City South Dakota. And our oil and gas subsidiary during the quarter continued to reduce cost and divest non-core properties. Since the beginning of last year, we saw 58% of our non-core gross wells and we’re targeting that divestiture of the remaining wells prior to year end. Moving onto slide 6, our highlights continued with corporate activities. Our universal shelf registration expires the 6 August and we plan to file a new shelf registration statement with the Securities and Exchange Commission concurrently with our second quarter Form 10-Q filing at the same time we intend to our At-the-Market equity offering program as well. On July 26, our board declared a quarterly dividend of $0.445 per share, which is equivalent to an annual dividend rate of $1.78 per share. And on July 21, Standard & Poors affirmed its credit rating of Black Hills Corporation at BBB with a stable outlook. During the quarter we recently took advantage of favorable short-term interest rates on our commercial paper program to prepay or repay $100 million of our corporate term loan borrowings which is due in 2019. And we discussed on last quarter’s call on April 1, at the beginning of the second Jennifer Landis was appointed as Senior Vice President and Chief Human Resources Officer. Moving onto slide 7, this slide just provides reconciliation of our second quarter net income from continuing operations as adjusted compared to the second quarter of last year. Rich will provide the segment details in his financial update. Rich.

[Richard Kinzley:]

Thanks Dave and good morning everyone. At a high level our second quarter financial performance was in line with our expectations. As adjusted earnings increased to $0.41 for the quarter compared to $0.39 last year. I’ll jump right in on slide 9 where we reconcile GAAP earnings to earnings as adjusted in non-GAAP measure. We do this to isolate special items and communicate earnings to better represent our ongoing performance. This slide displays the last five quarters and trailing 12 months as of June 30th for 2017 and 2016. As detailed on the slide, we experience special items not reflective of our ongoing performance in each of the last five quarters. The first special item is non-cash impairments that are oil and gas business that occurred last year. The second special item is acquisition related expenses such as advisory fees, financing and other third party consulting costs, associated with the SourceGas acquisition and integration. We completed nearly all the integration work related to the acquisition in 2016 and are finishing the few remaining projects in 2017. These acquisition related costs and non-cash impairments are not indicative of our ongoing performance and accordingly we reflect them on an as adjusted basis. As I already mentioned our second quarter as adjusted EPS was $0.41 which is $0.02 more than the second quarter last year. The second quarter results met our expectations as the quarter is composed of shorter months outside the main cooling season at our electric utilities which occurs in the third and the heating seasons that are gas utilities which occur in the first and fourth quarters. At the bottom of the slide we present EPS ad adjusted for the trailing 12 months. As shown we achieved $0.40 of as adjusted EPS growth of 13% increase for the trailing 12 months ended June 30, 2017 compared to the trailing 12 months ended June 30, 2016. The trailing 12 months earnings uplift is due primarily to a full 12 months ownership of the SourceGas utilities which were acquired in mid February last year. Turning to slide 10, you’ll see our second quarter revenue and operating income compared to last year. On the left side of the slide you'll note that 2017 revenues for Q2 exceeded those in 2016 by 7% due to revenue improvements in each of our business segments except oil and gas which had a decrease as we transition away from the traditional oil and gas business. On the right side of the slide you'll see that year-over-year operating income increased by our 3%. The operating income improvement was driven by increases at our power generation, mining, oil and gas and corporate segments. These improvements more than offset quarter-over-quarter decreases and decreases and operating income at both our electric and gas utility segments. I will discuss each of the operating segments in more detail later. The improvement in the corporate segment relates to the reduction of the internal labor charges to 2017 to acquisition and integration activities as compared to 2016. As I noted on the previous slide with the integration of SourceGas substantially complete employees have largely moved on to other projects and initiatives and the internal labor cost associated with those activities have predominately been charged to our utility segments in 2017. On slide 11 is our second quarter income statement. Gross margin, operating expenses and DD&A all increased 3% to 4% comparing Q2 2017 to Q2 2016. The gross margin increase was driven by our electric utilities and mining segments. Operating expenses and DD&A are higher mainly from our new electric and gas utility investment placed in service during 2016. Operating income before special item increased 3% quarter-over-quarter. For Q2 2017 the only special item was minimal acquisition related cost. Q2 2016 included special items for oil and gas impairments and more significant acquisition related cost. We experienced slight increase in interest expense year over year related to our mix of debt being more weighted to long term this year than last year and higher variable interest rates. Effective tax rate for the quarter was 29%. The tax rate benefited from production tax credits at our Peak View Wind farm in Colorado which went into service in late 2016. The line item for non-controlling interest reflects our sale of a 49.9% interest in Colorado IPP in Q2 of last year. The $3.1 million reduction in net income available for our shareholders represents third party ownership interest in that facility. I will talk a bit more about this on the power generation slide. Moving to the as adjusted net income line we reported 22.5 million for the quarter compared to 20.9 million for Q2 2016 and nearly 8% increase. Diluted shares increased in 2017 over 2016 due primarily to over 1.5 million additional weighted average shares in 2017 permission to the equity to our at the market equity offering program in 2016. Also as a result of our strong stock price performance in the first half of 2017, the application of the treasury stock method related to our unit mandatory convertible securities added approximately 2 million shares to the Q2 2017 diluted share count compared to approximately 1.4 million additional diluted shares in Q2 2016. In total, diluted shares increased by 2.4 million quarter-over-quarter just under 5%. I will note that during our seasonally low income second quarter the increased share count impacts CPS more dramatically. In the other higher income quarters and for the full year the effect of the additional shares is less impactful to EPS. On the bottom of the slide you will see that Q2 EBITDA increased by 3.2 million quarter-over-quarter or nearly 3%. Slide 12 displays our electric utilities gross margin and operating income. The electric utilities gross margin increased 6 million in the second quarter over 2016. The gross margin increased resulted primarily from the returns on our Peak View Wind project and transmission investments. Additionally, we saw increased commercial and industrial demand largely at our Wyoming electric utility thanks to data center expansions there. Operating income decreased by 2.1 million or approximately 5% for the second quarter compared to 2016. Operating expenses were higher as a result of increased generation expense, higher property taxes and depreciation associated with the new generation and transmission investments and prior year internal labor integration activities charged to the corporate segment in 2016 which are now being charged to our utility business segments. Our press release yesterday provides the details of the varied items that increased operating expenses of the electric utilities. I’ll also note a substantial component of the return on our Peak View Wind project is realized through production tax credits which are reflected in reduced income tax as rather than to operating income. These credits to our income tax amounted to 1.1 million in the second quarter and 2.5 million year-to-date. Moving to the right side of the slide 12 the results of our gas utilities for the second quarter reflected a decrease of 3.3 million in operating income. While gross margin was flat to the prior year we saw increase in expenses as the prior year benefited from internal labor charges to the corporate segment related to integration activities and transition activities. Again with integration largely complete our employees have moved down to the projects and these internal labor charges are now being charged to our utility business units. Additionally depreciation was higher in 2017 as a result of increased asset base. Because 2017 is the first complete year of SourceGas ownership I will expand on the near to date results of the gas utilities. The gas utility saw an increase of nearly 25 million in operating income comparing the first half of 2017 to the first half of 2016 with most of this increased attributable to the addition of SourceGas. We closed the acquisition on February 12 of 2016 so we picked up 42 days of SourceGas operating results in Q1 2017 as compared to Q1 2016. Also at our Legacy Black Hills gas operations operating income improved by nearly 5 million for the first half of the year 9% growth rate year-over-year benefiting from strong cost management as well as from shared services efficiencies realized from the SourceGas acquisition. Next I will talk about weather impacts in both our electric and gas utilities. Cooling degree days were slightly above normal during Q2 but had an immaterial effect on our electric utilities for the quarter. As I mentioned earlier we experienced warmer than normal weather for both Q2 and the first half of 2017. Heating degree days drive results more than cooling degree days in Q2 and heating degree days were 9% below normal at both our electric and gas utilities in Q2. This was true in Q1 as well where weather impacts are more notable and heating degree days were 13% below normal at our gas utilities. Comparing to normal weather at our utilities, our gas utility gross margins were negatively impacted by an estimated $300,000 in Q2 and by an estimated $6.7 million year-to-date. While our electric utilities gross margins were negatively impacted by an estimated $600,000 in Q2 and an estimated $1.5 million year-to-date. In total net unfavorable weather compared to normal has negatively impacted EPS by $0.01 in Q2 and $0.10 year-to-date. On slide 13 you see the power generation operating income increase slightly year-over-year. The power generation business unit continued to realize strong contract availability with its generating units and continued its cash flow contributions to Black Hills. Our power gen segment includes the Colorado IPP plant which is contracted to our Colorado electric utility plus the Y gen one plant which is contracted to our Wyoming electric utility. Colorado IPP accounts were approximately 60% of the operating income in our power generation segment. The numbers reflected on slide 13 include 100% ownership of Colorado IPP. As we have already mentioned in late April last year we sold 49.9% interest in Colorado IPP. We consolidate 100% of Colorado IPP's results and our financial statements and then back out to non-controlling interest at the bottom of the income statement. On the right side of slide 13, you will note our mining segment had $2.8 million operating income increase compared to the second quarter last year. For the quarter revenue was 3.9 million higher as tons sold increased by 51% compared to Q2 2016 due to an extended 11 week outage at the Wyodak power plant in the second quarter of 2016. We sell over one third of our coal annually to this plant. Keep in mind that revenue increased from this impact does not drop straight operating income as revenue related royalties and taxes increased accordingly. On the cost side on O&M including depreciation was 1.2 million higher in Q2 2017 than Q2 2016 commensurate with the increased ton sold. Also we removed 16% more over burden in Q2 this year compared to last year. Our mine continues to format a high level with sales almost entirely to onsite mine plants and roughly half of our sales based on our cost plus contract pricing mechanism. Moving to oil and gas and on slide 14, we reduced the operating loss in the second quarter to $1.9 million compared to an operating loss of $4.1 million for Q2 2016 excluding asset impairment charges taken last year. Second quarter volume sold decreased as an oil and gas production declined from the prior year due to divestitures and natural production declines. Also we are eliminating production in our [indiscernible] properties to meet only the minimal daily quantity requirements of our gas process in contract. The decrease in volume was more than offset by the combination of slightly higher average commodity prices received, natural gas and oil, lower DD&A resulting from previous impairments, lower lease operating expenses coupled with diligent G&A cost management all of which have helped minimize the operating loss from the segment. Dave will talk more about oil and gas strategy shortly. Slide 15 shows our capitalization, at June 30, 2017 our net debt to capitalization ratio was 66.1% a 90 basis points decline from one year earlier. As we move forward, we expect this ratio to continue to decline through growth in our stockholder's equity from earnings. We don't expect to add any significant debt in the near term as our internally generated cash flows are expected to fund our CapEx and dividends through 2018. Additionally we have $299 million of unit mandatories reported as debt on our balance sheet until those units convert to equity in the second half of 2018. By year end 2018, we expect our net debt to capitalization ratio to be well under 60%. I will also mention that on the equity side we issued nearly 2 million shares of stock through our aftermarket equity offering program in 2016 raising approximately 120 million. We haven't issued any shares under the program in 2017. We will keep the program active to provide financing flexibilities as we move forward and as Dave mentioned we plan to renew the program at an increase amount of 300 million when we renew our financing shelf later today in association with our 10-Q filing. While increasing the size of the program only to provide additional flexibility in the future but we intent to issue very few if any shares to the program and near term. We are committed to maintaining our solid investment great credit ratings and our forward forecasted metric support those ratings. Slide 16 demonstrates that we're in good shape relative to upcoming debt maturities. In the first quarter last year we executed significant debt financings to help fund the SourceGas acquisition. In the third quarter last year, we accessed the debt markets at a time when credit conditions were beneficial to successfully refinance debt we assume through the acquisition and term out other upcoming maturities. Also as Dave mentioned we also successfully implemented a commercial paper program in Q1 this year which will help minimize short term borrowing costs. Slide 17 shows our credit ratings. As you can see on the slide S&P recently affirmed our BBB rating with the stable outlook and we are BAA2 with the stable outlook from Moodys and BBB plus with the stable outlook from Fitch. As I mentioned just a moment ago we are committed to maintaining those ratings with a BBB to BBB plus equivalent being our target. Slide 18 illustrates our track record of growing operating earnings and the EPS. Our history shows periods where our earnings are occasionally flat year-over-year but our long term trend of growing earnings is excellent. I will discuss our slight revision to 2017 EPS guidance on the next slide. The midpoint of our 2017 guidance exhibits a full year of earnings contribution from the fully integrated SourceGas transaction taking the next step forward and continuing to build on our impressive track record of growing shareholder value as we serve our utility customers safely, reliably and efficiently. Moving to slide 19 we are updating our full year as adjusted earnings guidance to $3.45 to $3.60 per share from $3.45 to $3.65 per share. We have lowered the top end of our range by $0.05 to reflect the unfavorable weather we have experienced through June which as I mentioned impacted EPS for the first half of the year by an estimated $0.10. Further additional dilution due to the application of the treasury method of accounting for our unit mandatory securities which I also discussed earlier impacted our initial guidance range for the full year by approximately $0.03. Our stock price has performed very well in 2017 which impacts that calculation adding more diluted shares in 2017 than we had expected. We have implemented cost management initiatives to help offset these items but feel it prudent to reduce the top end of our guidance range at this time. We continue to be pleased with our operational execution despite the mild weather and dilution headwinds. I will turn it back to Dave now for his strategic overview.

[David Emery:]

All right. Thank you, Rich. Moving on to slide 21, from a forward strategy perspective we group our strategic goals into four major categories and we have done this for quite some time, those being profitable growth, valued service better every day and great workplace. Our overall objective is being an industry leader in all we do. Moving on to slide 22, during the past several quarters we have discussed at lengths our earnings growth strategy focusing our efforts during the next two to three years on securing the full benefits of the SourceGas acquisition and successful integration for both customers and shareholders and then following that returning to more traditional utility growth model over the long term. Moving to slide 23, Strong capital spending has in the past and we'll continue to drive much of our earnings growth. You will notice that this slide has been revised this quarter to update our planned capital spending. As we continue to refine our capital spending priorities at each of our utilities going forward we have increased our forecasted 2017 through 2019 capital by nearly $200 million to a total of almost 1.2 billion in this current forecast. Related to slide 23, it is worth noting small increase in oil and gas capital spending even though it relatively small change. We recently completed two wells which has been previously drilled and cased in order to provide production volumes to avoid paying minimum quantity short fall penalties under our gas processing agreement. In addition to providing sufficient production to avoid the penalties well into next year the investment in the two well completions also yield solid investment returns. You will notice that following this year we planned very minimal capital spending in our E&P segment. Moving on to slide 24, as you can see from this slide our capital spending both historical and forecasted far exceeds our depreciation contributing to our solid earnings growth. Slide 25 provides a regulatory update related to our Colorado and South Dakota electric utilities. On June 9, the Colorado public utilities commission denied our request for rehearing and reconsideration of the commission’s late 2016 rate review decision for our new 40 megawatt natural gas fire turbine in Pueblo, Colorado. On July 11, we filed an appeal on that PUC decision with the Denver District Court. We continue to believe very strongly that state law as well as prior PUC Presidents support our appeal. The court briefing schedule runs through November of this year and following that there is no firmed deadline for a decision by the court. Earlier I mentioned the recent approval of settlement agreement related to our South Dakota electric utility so I won't reiterate that again. Moving on slide to 26, also is noted earlier we continue to make excellent progress towards meeting the state of Colorado renewable energy mandates. As I noted we have issued a request for proposals for 60 megawatt of new renewable energy resources to be in service in 2019, we expect to preempt the results of that RFP to the Colorado PUC prior to year end to obtain their approval. Slide 27, we continue to believe strongly that utility cost of ServiceGas program will provide long term price stability and a reasonable expectation of long term lower natural gas cost for customers while providing opportunities for increased earnings for shareholders which is truly a win-win. However, the political considerations associated with sustained oil and natural gas price environment make it unlikely that we would be successful in obtaining regulatory approval for utility cost of ServiceGas program in the near future. We are currently evaluating our options on how best to proceed with the cost of ServiceGas program but it's very likely we will not file for approval of program prior to year end. We are also considering options on how to preserve and possibly capture the potential upside opportunity provided by our natural gas assets and Piceance while we continue to transition away from the traditional oil and gas exploration and production business. Moving on to slide 28, we continue to be very proud of our dividend track record having increased our annual dividend to shareholders for 47 consecutive years as I noted earlier our equivalent annual rate this year is $1.78. On slide 29 we focus every day on our operational excellence spend a lot of time benchmarking our performance against that of the industry and our peers. Our safety culture continues to improve and in fact for the seventh straight year our Wyodak operated with a perfect safety record of no loss time accidents and for the fourth year our Wyodak _ mine employees have been awarded the Governor’s workplace safety award for the smallest or for the safest small mine in the Powder River Basin. Finally, wrapping up on slide 30, which is our 2017 scorecard. This is our way of holding ourselves accountable to you our shareholders. We set forth our goals at the beginning of every year and continue to monitor and track our progress for you as the year progresses. Next, we will be hosting an Analyst Day on October 5th in New York City and at that time we do intent to provide some more details related to our future growth strategy and longer term capital spending plans among other things. We hope you can join us. That concludes our remarks for this morning. We'd be happy to entertain any questions you may have.

[Operator:]

[Operator Instructions] Our first question comes from the line of Michael Weinstein from Credit Suisse. Your question, please.

[Michael Weinstein:]

Hi, good morning.

[David Emery:]

Good morning, Mike.

[Michael Weinstein:]

Hey, you mentioned that you were looking at other ways to maximize the value of the remaining core Permian assets, I'm sorry, Piceance's assets. And I'm just wondering if is there any additional detail like what are your thoughts on ways to maximize value?

[David Emery:]

Well, we're in the process of evaluating that now, Mike, and kind of what the best options are. One of the questions we've received in the past is what we consider holding those properties for a period of time. I would say if we would, it would be for a relatively short period of time and only if we can really minimize it if not eliminate our operating losses associated with those properties. We do fully intent to continue our transition away from the traditional exploration and production business.

[Michael Weinstein:]

Okay. I think there was -- take away that I would come away with that comment is that you were thinking about a sale at some point. But I want to hear some other possibility besides those two options which is one is cost of services or either a sale of the property. Is there a third option in there?

[David Emery:]

Well, there is always opportunities, you could turn out your assets to another company or do something like that, I wouldn’t say that's real high on our list right now but it's certainly something that's possible. These other alternatives, obviously the sales are most obvious ones but not necessarily the one that would capture the most value.

[Michael Weinstein:]

Okay. And maybe you could frame up a little bit more about the October Analyst Day, what kind of additional information you intent to provide and for that?

[David Emery:]

Yes, I mentioned essentially, I think what we're comfortable saying today and then we really want to talk a little bit more about our long term growth plans and particularly the capital spending. We've talked a little bit in the past about when will our capital spending return to a more quote-and-quote normal level. You saw us increase or particularly our 2019 CapEx this quarter, little bit of increase in '17 and '18 as well as we continue to refine our forward strategy and each of our individual utilities. I think by the time we get to Analyst Day, we should have quite a bit more color on that for you as well as provide updates on several other things. That's possible, we may have some additional updates on E&P at that time and things like that.

[Michael Weinstein:]

Okay, great. Thank you very much. I look forward to seeing you in October.

[David Emery:]

Sounds good, thanks Mike.

[Operator:]

Thank you. Our next question comes from the line of Chris Turner from JP Morgan. Your question, please.

[Chris Turner:]

Good morning, David and Rich. I wanted to ask you about the changes to CapEx today. If we kind of just look at the numbers, it's a pretty material increase as you said versus your prior plan there. Has anything changed with your strategy that resulted in this increase and if not why did the increase occur now?

[David Emery:]

Yes. I don’t think anything's changed big picture wise, Chris. We've talked about subsequent for the SourceGas acquisition. We really wanted to look at how to maximize the value of our integration benefits there for both customers and shareholders and be very prudent about how we spend capital in the first few years subsequent to that. Now that we've owned it for a year and a half or so, when we're really refining the individual spending forecast in each utility, I'd suggest that some of those there may be some opportunity sooner rather than later to increase spending because of needs in those particular utilities. So, I would say the strategy hasn’t changed, we've just been able to spend a lot more time on the details of each individual company, now that we finalized all of our integration related activity and things like that.

[Chris Turner:]

Okay. And I think you've been clear in your message with this multi-year strategy that you only want to deploy capital where you can get a timely return on that capital. What is the other category for electric and gas utilities consist of in the CapEx chart?

[David Emery:]

Essentially, that would be some of the longer term more reliability related CapEx, things that we have to spend and maintain reliability in a good system for the benefit of our customers even though some of that CapEx may require rate cases and other things for recovery. And as you see some of that spending increasing over time, that will in the future require us to file for regulatory rate review proceeding.

[Chris Turner:]

Okay. But it didn’t distinct from the kind of full lag category?

[David Emery:]

Yes. I mean, I don’t know if I would say it's distinct from the full lag category, some of it includes what you might consider the full lag category. Some of that spending we have to do whether or not we want to file for rate reviews in the near future, there is still some of that spending we really need to do to maintain the buy ability of our system.

[Chris Turner:]

Okay. And then switching gears just for 2017 in particular on the O&M fronts, Richard if you kind of made it clear around $0.10 of weather versus normal year-to-date. As said you and you're trying to make up for a listed chunk of that with more cost cuts that you originally anticipated. So, it sounds like everything is leased on track on the cost cut front. But what's the amount of O&M that was at corporate or overhead expense that was at corporate last year on an adjusted basis as you report earnings that is now being moved for the full-year into the second?

[Richard Kinzley:]

Yes. I can't give you those numbers right off the top of my head, segment-by-segment, Chris. But if you look in our press release yesterday, you'll see those details.

[Chris Turner:]

Okay. See the detail of which were the first half actuals?

[Richard Kinzley:]

Correct. And you said cost cutting. I would characterize it maybe more as cost management. But yes, we're looking closely at all that for the second half of the year.

[Chris Turner:]

Okay. And is that at least a corporate cost that is essentially being spread out evenly among the different segments?

[Richard Kinzley:]

It's corporate cost and it's at all the business units, we're looking across the board.

[Chris Turner:]

Okay. Alright, thanks guys.

[Richard Kinzley:]

Alright, thank you.

[Operator:]

Thank you. Our next question comes from the line of Insoo Kim from RBC. Your question, please.

[Insoo Kim:]

Good morning everyone, and happy Friday.

[David Emery:]

Good morning, Insoo.

[Insoo Kim:]

Good morning, Dave. Just starting, a couple of questions. One with the cost of service desk, comments. It seems like the way you said, are you still left open the possibility that you may potentially file the COSG beyond this year’s or maybe next year if maybe the prices seem right. Is that still an option that you're keeping on the table or is it that all of them equal, it just seems less likely that you'll file at all?

[Richard Kinzley:]

I mean, we would like to file but I think the likelihood of something happening that's dramatic enough to the gas markets in the next re-enable period of time, something that would trigger us to files, someone unlikely. We certainly would like to do that but we also have to feel like we have a reasonable chance of obtaining regulatory approval on. I think, right now that would be extremely difficult. And no, absent some big change you don’t really see that changing a whole lot even though we wish it would.

[Insoo Kim:]

Right, for sure. But that would mean that the timeframe for whether this goes whether your asset go into a potential program or in divesting or moving away from that business. The timeline for that hasn’t really been pushed back at all. So, you're still thinking by end of next year let's say you would have something completed to that extent?

[David Emery:]

Yes. We certainly hope so. I mean, as I made the comment earlier about reconsider holding up for a while just to make sure that we receive an appropriate value and how we choose to capture value from those Piceance assets. And that's a reasonable timeframe. We don’t have a firm deadline but we clearly are in the process of transitioning that business.

[Insoo Kim:]

Got it. And just one more from me. On the CapEx, if I look at the historical three-year run-rate for CapEx in SourceGas, I think it hovered kind of around that 1.2 billion to 1.3 billion. So, this kind of seems to be in that run-rate. But given that you have added SourceGas in the past year, does that mean that the ultimate potential run-rate for like a three year level is actually greater but that incremental level that you may be looking to do is either ones that are not recoverable immediately through holding off on that until more in that '19 or the 2020 and beyond timeframe?

[David Emery:]

Yes. I wouldn’t make a specific comment about what the ongoing run-rate is but I do think you see that we're increasing CapEx at '19 and one of the topics we hope to be able to provide a little more color around during our Analyst Day is what those long range plans are and what are returned to a more normal capital spending level is now that we own SourceGas and is fully integrated there.

[Insoo Kim:]

Got it. Okay, thank you very much.

[David Emery:]

Good. Thank you, Insoo.

[Operator:]

Thank you. Our next question comes from the line of Lasan Johong from Auvila Research. Your question, please.

[Lasan Johong:]

[Indiscernible] Also you said something kind of extremely irrational about the cost of SourceGas program. So, I was just wondering that you shall share something [indiscernible]. Could you say that thing be very likely to be rejected because we are in the sustained period of low gas price environment? You didn’t say that, right?

[David Emery:]

I did say that, yes.

[Lasan Johong:]

You did say that.

[David Emery:]

Which, I understand why you think that would be irrational and it makes sense probably from a strategic perspective to and or in the programs when prices are low. And I don’t --.

[Lasan Johong:]

So, that's the only time you would?

[David Emery:]

They expect the political reality of it is there is very little incentive for regulators to tackle a new program that's unfamiliar for them during a period when they think gas prices are likely to remain low. Right run or other one to say.

[Lasan Johong:]

Well, you might have thought.

[David Emery:]

Yes. Obtaining approval is highly unlikely.

[Lasan Johong:]

Well, you never thought to pull it there because that's the way they stayed and Jesus Christ, that would have want you to be imploded, that kind of argument later on. When you have to inflate the reserves. Okay, well that's kind of screwed up, let's say it is what it is. Second, you guys don’t pay cash taxes, correct. So, the PTC the book reduction as a possible natural cash induction?

[Richard Kinzley:]

That part of that was on by, can you ask that again, please?

[Lasan Johong:]

Yes, sure. Your production cash rate deductions of your income tax, that's actually a book deduction is done a actual?

[Richard Kinzley:]

Yes. Your, that's right, it's just adding basically to the time period. I mean, we're not going to be a cash tax payer probably until well into the next decade, 2021, 2021, at this point.

[Lasan Johong:]

Yes.

[Richard Kinzley:]

So, all that's doing is its spending it out, it's a book, it's not a cash benefit it's a book benefit at this point.

[Lasan Johong:]

Okay. Have you guys considered monetizing it or it is not enough?

[Richard Kinzley:]

I didn’t catch that either, I'm sorry?

[David Emery:]

He said, about monetizing.

[Lasan Johong:]

I apologize.

[Richard Kinzley:]

We consider monetizing it. Well, all eyes looking at ways to improve our tax efficiency Lasan. So, we talked about that, something we'll always look at but we haven’t elected to do that at this point.

[Lasan Johong:]

Got you. Third question. Did you say you're renewing the aftermarket shop registration filing for $300 million?

[Richard Kinzley:]

We are.

[Lasan Johong:]

And if I'm not mistaken, will it go how deep with that at the very near term, correct?

[Richard Kinzley:]

No, we don’t. We don’t intend or really issue any shares in the near term as I mentioned. But it's a nice piece of flexibility to have in the event something comes up.

[Lasan Johong:]

Okay. So, I am correct in surmising that this is a -- how I put this -- say -- a potential source of -- from if and when you need something big. What did you just say?

[Richard Kinzley:]

Yes, I mean, well "Quick" is a relative term, you're not going to go issue $300 million on that program in a very short period of time. But last year we demonstrated how effective that was last year by getting a $120 million placed over a period of six to seven months. So, we just like having it there to provide some flexibility.

[Lasan Johong:]

Right. Can I rewind it, it doesn't just show flexibility?

[Richard Kinzley:]

I'm sorry, I missed that Lasan.

[Lasan Johong:]

I'm sorry. Is it okay if I went a little more into it than just show a flexibility?

[Richard Kinzley:]

No, I wouldn’t read anything into it. Again, it's just it's a program we like to have in place.

[David Emery:]

Now, it's a very good tool for us, we never had one before. We liked it a lot, we want to keep it as a tool in the future if we need it. Nothing more, nothing less.

[Lasan Johong:]

Okay. Thank you. That's just from me. I appreciate it.

[David Emery:]

Alright, thank you.

[Operator:]

Thank you. Our next question comes from the line of Chris Ellinghaus from Williams Capital. Your question, please.

[Chris Ellinghaus:]

Hi, good morning guys, how are you?

[David Emery:]

Good morning, Chris.

[Richard Kinzley:]

Good morning, Chris.

[Chris Ellinghaus:]

I might have missed this, but I believe when you were talking about the CapEx situate to increase the total budget about $200 million. Can you just talk about what you might said about that proportion of that capital that has direct cost recovery mechanisms?

[Richard Kinzley:]

Well, we laid the slide out differently this quarter to help you be able to see that, Chris.

[Chris Ellinghaus:]

Okay. It's in that one.

[David Emery:]

Yes, we changed the format of the slide. We didn’t make a lot of commentary specifically on what drove change, other than a review of our individual utilities and when we thought it prudent to make that next round of investments in each of those utilities. But we did lay it out a little differently this time, so hopefully you can kind of get a sense for the types of CapEx and then the lag associated with that.

[Chris Ellinghaus:]

Okay, I'll look at that.

[David Emery:]

Okay.

[Chris Ellinghaus:]

As far, you didn’t say anything about in terms of cost of service gas, what you had been talking about partnership wise, can you just give us an update on that and even if you're not filing, are you making progress on that?

[David Emery:]

I think we have companies who would love to partner with us in a cost of service gas program provided we could recommend one that would get approval. As I said before, I think right now we're concerned that we wouldn’t be able to recommend one that would receive regulatory approval. So, we haven’t spent any more time working at a lot of real specific details with the potential partner, largely because we don’t think that we can file for approval right now, anyway. But we do still have parties who would be interested in partnering with us if we were to go ahead with the program.

[Chris Ellinghaus:]

Okay. Given that, if you're not working on a partnership and you don’t have any real near term expectations for success with cost of service gas programs. And you did say you don’t have a sort of a hard schedule for making a decision on the Piceance assets. Have you got some kind of schedule in the back of your head, how long do you think you can wait on those assets if current conditions sort of persist?

[David Emery:]

We got the question earlier about would we still be on a similar timeline kind of by late next year to have things decided and I answered that yes, I thought that was reasonable. I made the comments specifically that if we hold those assets hoping to lay them in the value somehow, we would only do that for a relatively short period of time and in a situation in which we either completely minimized or made negligible any operating losses we would have by holding them.

[Chris Ellinghaus:]

Okay. And lastly, when you updated the guidance, what was your sort of thought process in terms of July, whether so far did you include that in your thinking on the guidance. I guess, that's just it.

[David Emery:]

Yes. I mean, we don’t have from numbers yet for July, Chris. But certainly living in South Dakota has been hot. So, that factored into how we formed up our guidance.

[Chris Ellinghaus:]

Okay. So, you only reduced the top end by a nickel and you've had weather and delusion headwinds. So, we can assume that part of that good July is one of the offsets to those two issues in addition to the cost controls?

[David Emery:]

I think that's fair.

[Chris Ellinghaus:]

Okay.

[David Emery:]

But when you look at the August forecast, we'll see what, it's supposed to be fairly cool here. So, not hot. So, weather keeps moving back and forth.

[Chris Ellinghaus:]

Right. But you'd rather have July weather than August weather, right?

[David Emery:]

I'd rather not live in it but for business purposes, yes, we'll take it.

[Chris Ellinghaus:]

I'm not really all that concerned about your sweating during July.

[David Emery:]

Fair enough.

[Chris Ellinghaus:]

All right. Thanks for the details, guys.

[David Emery:]

Thank you, Chris.

[Operator:]

Thank you. At this time, there are no questions in the queue. [Operator Instructions]

[David Emery:]

Alright, if there's no additional questions, we want to thank you for attending our call this morning. Look forward to hopefully to seeing some of you register for Analyst Day in October. Have a great rest of your day. Thank you.

[Operator:]

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