Good day, ladies and gentlemen, and welcome to Black Hills Corporation Third Quarter 2018 Earnings Conference Call. My name is Brian, and I'll 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. As a reminder, this conference call 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, Brian. Good morning, everyone. Welcome to Black Hills Corporation's Q3 2018 earnings conference call. Before we begin today, I would like to note that Black Hills will be attending the EEI Financial Conference starting November 11 in San Francisco.
The company will host 1 on 1 meetings throughout the conference and deliver a presentation to investors on Tuesday, November 13. Our presentation materials and webcast information will be posted on our website at www.blackhillscorp.com under the Investor Relations heading after market close this Friday. Leading our quarterly earnings discussion today are David Emery, Chairman and Chief Executive Officer Lynn Evans, President and Chief Operating Officer and Rich Kinsley, 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 ks 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 David Emory.
Thank you, Jerome. Good morning, everyone. Thanks for joining us. Before I jump in on the webcast deck, I've got a couple of comments. Last week, I announced that after almost 15 years as the CEO, 14 of those as Chairman and CEO, but I plan to retire as CEO of the company effective December 31.
To help ensure a smooth transition following my retirement as CEO, I'll continue to serve as an employee of the company in the role of Executive Chairman of the Board until May 1, 2020, which is through the end of my current Board term, which will end at our Annual Meeting of Shareholders in late April of 2020. Consistent with our long standing and real comprehensive succession planning process, Lynn Evans, our current President and COO, was appointed to succeed me as Chief Executive Officer effective January 1. Lynn was also appointed to the Board of Directors effective November 1. I'm really confident that now is the right time to transition the company to a new CEO. We've completed the divestiture of our oil and gas subsidiary, which is our final non utility related business.
Now as an electric and natural gas utility with 1,000,000 and a quarter customers and 800 communities in 8 states, we have an excellent strategic plan in place to help ensure success for years to come. Lynn is absolutely the right person to lead Black Hills into the future. During his 17 years with Black Hills, he's played a key leadership role in the transformation and growth of the company. He will also guide an experienced officer team, most of whom have also been a key part of the company's past success over the years. I look forward to helping ensure a successful and seamless transition and to assisting Lynn and the leadership team as Executive Chairman.
The future of the company is really exciting, and I think it's going to be great. Now on to the slide deck. I will start on Slide 3 for those of you following along in the webcast presentation. Given the upcoming leadership changes, we have modified our format a little bit for this quarter. I will cover the highlights from the quarter, Rich will cover the financial update, and then Lynn will discuss forward strategy.
We had an excellent third quarter, marked by a lot of significant operational and regulatory accomplishments, all of which I think set us up really well for the future. We also raised our 2018 earnings guidance, basically reflecting our year to date performance and our confidence in the balance of the year. Moving on to Slide 5, 3rd quarter highlights for our utilities. Following quarter end on October 31, our Wyoming Electric subsidiary received approval from the Wyoming Public Service Commission for a real comprehensive settlement that resolves all the outstanding issues related to our power cost adjustment or PCA in Wyoming. The settlement resolves several years of disputed issues related to the PCA, including the price escalation contained in the Wi Gen 1 plant power purchase agreement between our power generation subsidiary and Wyoming Electric.
As part of that settlement, we agreed to credit customers $7,000,000 total between 2018, 2019 2020. Rich will discuss the recognition of these customer credits in more detail in his financial update. The settlement provides excellent benefits for both shareholders and customers, and we're really pleased to have that issue behind us. Other highlights on Slide 5 include the approval on October 10 by the Colorado Public Utilities Commission to merge our 2 gas LDC companies in Colorado. This is the first important step in a multi year project to consolidate our several gas LDC companies that we own in 3 separate states.
Also during October, we received approval of a successful rate review for Arkansas Gas and our Colorado electric utility set a new winter peak load. Moving on to Slide 6, continuing with utility highlights. We received approval for Nebraska Gas Distribution to extend the recovery period of its system safety and integrity rider, which was set to expire October 31, 2019, that rider is now extended to December 31, 2020. The rider provides about $6,000,000 in revenue per year. That rider extension coincides really well with our plans to file in late 2019 or early 2020 for approval of the consolidation of our 2 natural gas distribution utilities in Nebraska.
During July, South Dakota Electric placed in service the first 48 mile segment of our planned $70,000,000 175 mile electric transmission line from Rapid City, South Dakota to Stegall, Nebraska. The remainder of the line is expected to be placed in service next year in 2019. In addition, during July, our Northwest Wyoming Gas Utility received approval for a rate review and our Wyoming Electric subsidiary set a new all time peak electric load. In June, our Kansas Gas utility received approval from the Kansas Corporation Commission to double the amount of annual eligible spending for safety related investments under its gas system reliability rider. The Kansas legislature had previously passed legislation enabling that increase.
And as a result, our rider eligible spending in Kansas will increase from approximately 4,000,000 dollars to $8,000,000 a year going forward. Finally, during the quarter, our utilities approved received approval to deliver the benefits of corporate federal income tax reform to customers in both South Dakota and Arkansas. We've now successfully completed federal income tax reform in 6 states with only Wyoming remaining. Slide 7, power generation highlights. Our Black Hills Electric Generation subsidiary reached an agreement to purchase a 3rd party's 50 percent interest in our Busch Ranch Wind Farm in Colorado a little over $16,000,000 That purchase is subject to FERC approval, which we expect prior to year end.
Our Colorado Electric subsidiary owns the remaining 50% interest and operates the wind farm. They also purchase all of the energy under a long term power purchase agreement. Corporate highlights are covered on both Slides 7 and 8. Since late July, excuse me, since late July, we completed several meaningful finance related transactions. First, we issued 6,370,000 shares of new common stock on November 1.
That was related to the conversion of our outstanding equity units, which we issued in November 2015 to help finance the Source Gas acquisition. The proceeds will be used to retire debt. As of November 1 and the conversion of those units, we now have just under 60,000,000 shares of common stock outstanding. We increased our quarterly dividend by 6.3 percent to $0.55 per share. That increase represents our 49th consecutive annual dividend increase, which is one of the longest streaks in the utility We amended and restated our $750,000,000 revolving credit facility.
We amended and restated our $750,000,000 revolving credit facility, extending the term to July 30, 2023. And we amended and restated a $300,000,000 term loan extending that maturity to July 30, 2020. And finally, during the quarter, S and P Global upgraded our corporate credit rating to BBB plus with a stable outlook. Slide 9 provides a reconciliation by business segment of adjusted earnings from Q3 2017 to Q3 2018. Rich will provide detail on the segment variances in his financial update.
Moving to Slide 10, I will turn it over to Rich to provide the financial update. Before I do, just noting the picture on that slide, in late August, members of the company's management team had the opportunity to ring the opening bell on the New York Stock Exchange. We were celebrating our 130th anniversary of service to our utility customers, which began in Deadwood, South Dakota in September 18, 83, a pretty significant milestone. Now with that, I'll turn it over to Rich for the financial update. Rich?
All right. Thanks, Dave, and good morning, everyone. Financial results for the Q3 did meet our expectations considering that in the Q3 we had unfavorable weather impacts on margins compared to last year and we recorded revenue credits associated with the settlement at Wyoming Electric that Dave mentioned. I'll get into more detail on these items on the following slides, but in short, these items explain the majority of the difference between the Q3 last year and the Q3 this year. I'll start on Slide 11, where we reconcile GAAP earnings to earnings as adjusted and non GAAP measure.
We do this to isolate special items and communicate earnings that better represent our ongoing performance. This slide displays the last 5 quarters and trailing 12 months as of September 30, 2018. Working from top to bottom on the slide, the first special item related to one time acquisition costs incurred as part of the SourceGas acquisition and integration, which was wrapped up at the end of 2017. The second item relates to tax reform. At the end of 2017, we recorded a benefit related to tax reform.
And in the 1st and third quarters this year, we recorded expenses associated with the new law. The expenses this year relate to our continued evaluation of the impact of the new law on our financial statements as well as impacts from continued revisions to the law. For example, in the Q3, the IRS posted changes related to bonus depreciation, which resulted in recognition of additional expense. The 3rd item you see related to the tax benefit of a legal restructuring effectuated in Q1 2018. These items were not indicative of our ongoing performance and accordingly we reflected them on an as adjusted basis.
Our 3rd quarter EPS was $0.42 compared to $0.52 for the Q3 last year. The waterfall chart on Slide 12 illustrates major drivers bridging Q3 2017 to Q3 2018. All amounts on this chart are net of income taxes. First, you'll note we had reduced revenue in 2018 as a result of recording reserves related to passing tax reform benefits on to our utility customers. These revenue reductions are offset by reduced income taxes.
We've reached agreement with regulators in all our states relating to tax reform with the exception of Wyoming, where we plan to file our tax reform plan in the Q4. Outside of the revenue reduction for tax reform, gross margins were flat. Gross margin in Q3 2018 was impacted by approximately $5,000,000 after tax or the equivalent of $0.09 of EPS by the settlement at Wyoming Electric and negative weather year over year. Other drivers for the quarter were typical year over year expense increases to support our growth efforts. I'll get into more detail on margin and expense drivers in the following slides.
Slide 13 displays our 3rd quarter income statement. Gross margin decreased $7,600,000 year over year due to the items I noted on the previous slide, most notably revenue reserves for tax reform, which again are offset below the line by reduced income tax expense. Operating expenses increased to support our growth initiatives and DD and A was up as a result of additional customer focused utility investments. Moving below operating income, interest expense increased year over year due to slightly higher average debt balances in Q3 this year versus last year and due to higher interest rates on our variable rate short term debt. As you know, the short end of the interest curve has risen substantially this year.
Income tax expense was down from the prior year, driven by tax reforms corporate rate reduction. I will point out the $7,500,000 of tax expense in Q3 includes $5,300,000 related to adjustments resulting from tax reform, which is an as adjusted item for the quarter as I noted on Slide 11. Moving down to income from continuing operations as adjusted, we generated $23,100,000 for the quarter, down from $29,200,000 last year. You'll note our diluted share count decreased year over year. This is due to the application of the treasury stock method of accounting related to the unit mandatory securities we issued in late 2015 to help fund the Source Gas acquisition.
As Dave mentioned, on November 1 this year, we issued common shares upon conversion of the unit mandatories. I'll talk more about that shortly. But prior to conversion, we were required to apply the treasury method of accounting, whereby we include a portion of the shares in our diluted share count. The number of shares we included is based on the average daily closing price of our stock during a given reporting period. We added approximately 1,300,000 shares to our diluted share count this quarter compared to 2,000,000 additional shares in Q3 last year.
I'll now discuss each business segment. Slide 14 compares Q3 2018 to Q3 2017 for our electric and gas utility segments. On the left side, the results at our electric utilities for the Q3 this year reflect $3,100,000 lower gross margin and a decrease of $9,500,000 in operating income. Q3 2018 gross margins at the electric utilities saw the benefits of new transmission investment recovery and higher non energy services, including power marketing and technical services. Also new this year in margin for the electric utilities is rent income for our new corporate headquarters, which is owned by South Dakota Electric and charged out to all our operating subsidiaries.
The net impact on consolidated results is awash. These positives to gross margin were more than offset by the revenue reserve for tax reform, the revenue credits for the Wyoming Electric settlement and unfavorable weather. These gross margin changes are detailed in the table on Page 9 in yesterday's press release. Operating expenses at the electric utilities increased $6,300,000 as a result of higher labor and benefits, outside services and facility costs, as well as higher property taxes and depreciation on additional utility capital investments. Moving to the right side of Slide 14, the results at our gas utilities for the Q3 this year reflected $2,000,000 lower gross margins and a decrease of $7,100,000 in operating income.
Positive gross margin impacts from customer growth in non utility services were offset by revenue reserves reform and negative weather impacts year over year. Expenses increased by $5,000,000 due to higher labor and benefits, outside services and facility costs. The increased facility costs at both the electric and gas utilities are offset by increased rent revenue at the electric utilities as I just noted. Additionally, gas utility depreciation was higher in 2018 as a result of utility capital investments. As a reminder, our natural gas utilities generate their earnings in the 1st and 4th quarters with expected breakeven or losses in the 2nd and third quarters.
The gas utilities results for the 3rd quarter met our expectations. Next, I'll talk about weather impacts compared to normal at our electric and gas utilities. To be clear, the weather related numbers on Pages 9 10 of the press release yesterday and on Page 12 of this presentation reflect weather impacts in Q3 this year compared to Q3 last year. I'll now be comparing Q3 2018 to normal weather with these comments. The 3rd quarter represents the main cooling season at our electric utilities with limited heating degree days at both our electric and gas utilities.
Also, there is typically Q3 benefit at the gas utilities from gas load related to irrigation activity in our service territories. This activity is dependent on both temperature and precipitation. While cooling degree days at our electric utilities were 9% higher than normal during Q3 2018, heating degree days were 20% below normal at the electric utilities and 27% below normal at the gas utilities. Also, it was unusually wet in 2018 in our key irrigation areas in Q3 this year, reducing irrigation activity. Compared to normal, weather conditions negatively impacted Q3 margins this year at the electric and gas utilities by approximately $500,000 $2,200,000 respectively.
This amounts to a negative Q3 impact to EPS related to weather of $0.04 compared to normal. Year to date through September 30, weather has had a $0.03 positive EPS impact compared to normal. On Slide 15, you see the Power Generation operating income increased by $900,000 primarily from higher power purchase agreement pricing and an increase in megawatts sold. The Power Generation segment continued to realize strong contract availability from its generating units outside of planned outages and is positioned to continue its strong earnings and cash flow contributions. Also on Slide 15, you'll see our mining segment had a $300,000 operating income increase.
For the quarter, operating costs increased by $400,000 excuse me, decreased by $400,000 from lower maintenance costs and savings on labor and benefits, while revenue was $200,000 lower due to a 6% decrease in tons sold. Our mine continues to perform at a high level with sales almost entirely to on-site mine mouth plants and roughly half our sales based on a cost plus pricing methodology. Slide 16 shows our capitalization. At September 30, our net debt debt This was driven by the increase in retained earnings, thanks to strong earnings for the 1st 9 months of 2018. Slide 17 describes our unit mandatory conversion which occurred last week.
These securities were issued in November 15 as part of the financing of the Source Gas acquisition as Dave mentioned. With the conversion of the unit mandatories to common equity last week, our unit mandatory securities were delisted. In August, we issued $400,000,000 of senior unsecured notes due 2,033 at a 4.35% coupon. Concurrently, we successfully remarketed the $299,000,000 principal amount of junior subordinated notes component of our equity units. Each of these equity units was comprised of a contract to purchase Black Hills common stock and an interest in our 3.5 percent junior subordinated notes due 2028.
We exchanged the junior subordinated notes for senior unsecured notes and canceled the junior unsubordinated notes. The remainder of the upsized debt offering was used to pay down a portion of our commercial paper borrowings. On November 1, the stock purchase contract settled. We received gross proceeds of $299,000,000 and issued approximately 6,300,000 6,370,000 shares of Black Hills common stock. Proceeds from this stock issuance will be used to retire the 250,000,000 dollars of 2.5 percent notes that are due in January 2019 with the extra proceeds used to again reduce commercial paper borrowings.
As a result of these activities, our net debt to capitalization ratio will decline both 60% in the 4th quarter. And as Dave noted, as of November 1, we have just under 60,000,000 shares of common stock outstanding. With the unit settled and associated common stock issued, we will no longer apply the treasury method after November 1. Slide 18 shows our debt maturity schedule. The schedule is updated to reflect our capital markets activities executed in the 3rd quarter.
Dave noted that in the Q3, we extended our $300,000,000 term loan into 2020 and extended our revolving credit facility through mid-twenty 23. We're in great shape from a liquidity perspective and our debt maturities are very manageable. Slide 19 shows our investment grade credit ratings. In August Standard and Poor's upgraded us to BBB plus and Fitch recently affirmed their BBB plus rating. We are committed to maintaining our strong investment grade ratings.
On Slide 20, we're increasing the lower end of our 2018 earnings guidance range by $0.05 with the revised range now at $3.35 to $3.50 per share. This guidance range assumes normal weather in the Q4 as it pertains to the winter heating season at our utilities, which is our biggest risk to meeting the guidance range for 2018. Slide 55 in the appendix sets forth the major assumptions related to this 2018 guidance. Also, we are initiating earnings guidance for 2019 with a range of $3.35 to $3.55 per share. As we've noted in previous calls, we must grow 2019 net income by approximately 8% to keep EPS flat with 2018 due to the dilution created by the share issuance last week associated with the unit mandatory conversion.
Further, we are initiating preliminary guidance for 2020 with a range of $3.50 to $3.80 per share. While we don't intend to make 2 years of guidance our regular practice, we are providing this preliminary 2020 guidance to demonstrate confidence in our customer centric growth strategy, which includes substantial capital expenditures to maintain and enhance the safety and reliability of our utility systems. The major assumptions relied upon to formulate the earnings guidance for both 2019 2020 are noted on Slides 5657 in the appendix. You'll see that we assume equity issuances through our at the market equity program of $25,000,000 to $50,000,000 in both 2019 2020 to increase the CapEx program, which increased by over $200,000,000 for 2018 through 2022 as compared to the CapEx we disclosed last quarter. Lynn is going to discuss our strategy around this CapEx program in his comments.
And with that, I will turn it to Lynn.
Thank you, Rich. Good morning, everyone. Please allow me to start by saying congratulations to David. He's been an incredible leader and a mentor to me as well as the entire leadership team and our employee team. During Dave's tenure as our CEO, he led the remolding of our organization into what it is today.
When David became our CEO in 2004, we had fewer than 900 employees. We're nearly 2,800 employees today. Also, our assets have grown from $2,100,000,000 to $6,700,000,000 and our market cap has grown from approximately $900,000,000 to nearly $3,700,000,000 Those are some outstanding accomplishments and we appreciate Dave. We're really looking forward to his ongoing guidance and inspiration as he becomes our Executive Chairman. For me, it's been a great privilege to work for Black Hills for more than 17 years now.
I've reported directly to David for 15 of those years, and I guess that's enough for anyone. So David deserves retirement for that alone. I've also been fortunate to be at the senior management table for the past 14 years. As such, I believe strongly in our utility focused strategy. We'll build upon as we focus on growth and delivering industry leading customer service and reliability.
We'll do that in the safest and most efficient manner possible. I'm particularly excited to continue an outstanding partnership with the company's very experienced leadership team, all of whom have played key roles in the company's success and will play key roles in our company's future success. And also, I'm looking forward to the opportunity to work closely with our valued stakeholders, of course our customers, our investors and analysts, our regulators and our many other partners as we execute our utility oriented strategic plan. With that now, I'll start with Slide 22 in the deck. Consistent with the past several years, we group our strategic goals into 4 major categories: Profitable Growth, Valued Service, Better Every Day and Great Workplace, with the overall objective of being an industry leader in all that we do.
These goal categories will continue to be our focus. The Black Hills organization is focused on being a best in class natural gas and electric utility. With the strategic divestiture of our oil and gas subsidiary, which was our final non utility supporting business, our strategic plan is clearly focused on being a customer centric utility and being top quartile of everything that we do. On Slide 23, from a strategy execution perspective, we are focused on delivering strong long term total shareholder returns. We plan to accomplish that by achieving a long term EPS growth rate above the utility industry average, targeting a 50% to 60% dividend ratio payout ratio, while retaining the flexibility to increase the dividend during periods of slower EPS growth, just as we did last week, while we continue our track record of what is now 49 consecutive annual dividend increases.
Moving to Slide 24, we have essentially completed the process of transitioning our earnings growth drivers from an acquisition and integration focus to more of a traditional utility strategy. In 2018 2019, we years in preparation for rate review filings or commencing rate review filings in certain jurisdictions. In 2019, we are forecasting a return to strong net income growth as made possible by the successful Source Gas acquisition and its integration and our strong customer centered capital investment program. This strong 2019 net income growth is expected to be largely offset by the 8% equity dilution, which resulted from the November 1 conversion of the equity units. Commencing in 2020 beyond, we expect strong long term EPS growth driven by our diverse and ongoing capital investments that will meet customer needs, our continued focus on standardization and efficiency improvements, and more regular rate review filings as we return to more traditional utility model.
Moving now to Slide 25. As we focus on delivering strong long term shareholder returns, our fuel and service territory diversity reduces business risk and helps drive more predictable earnings. On Slide 26, our strategic utility acquisitions over the years have resulted in greater opportunity through larger transmission and distribution systems and of course an expanded customer base. With increased scale comes a greater need to invest in being ready to serve our customers and of course our shareholders. Our geographic reach and footprint delivers more diverse opportunities for investment.
It also delivers more interconnections for reliability and growth and greater overall efficiency of operations. Slide 27. Strong capital spending for customer needs will continue to drive much of our future earnings growth. Now we've added $208,000,000 to the capital investment plan we presented to you last quarter and our total forecasted investment is now more than $2,500,000,000 over our current 5 year plan period, which will help us better serve our 1,250,000 customers. Notably, dollars 123,000,000 of the $208,000,000 increase will occur in 2019 2020 and is represented primarily by additional programmatic integrity and facility investments at our gas utilities.
That level of investment far exceeds depreciation, which will drive earnings growth. Slides 2829 provide a detailed capital investment forecast for our gas and our electric utilities. We've included breakouts by state, by investment type, and by recovery mechanism. These numbers have been increased this quarter largely due to our proposed customer safety and reliability investment plan. As we continue to enhance and execute our customer centric investment program over the next couple of quarters, we will continue to disclose additional details with respect to our capital investment.
Moving to slides well, slides 3031 are new slides that we've added this quarter. We've had lots of discussions with investors inquiring about the sustainability of our utility investment programs. We have significant customer investment opportunities, and these slides are intended to provide clarity into our longer term opportunities. We are delivering on our commitment to demonstrate to all of our stakeholders the ongoing long term base capital investment requirements we forecast beyond 2022. On Slide 30, we currently anticipate an ongoing $225,000,000 to $250,000,000 annual investment need within our gas utilities to ensure a safe and reliable system and to meet forecasted customer growth.
This annual run rate is expressed in $20.18 and does not include large pipeline projects such as a natural bridge project in Wyoming that we're currently working on. As we enhance our customer investment programs and continue to grow, we expect this run rate will increase as we continue to evaluate our system and review pending TINSA rules. We are working with our regulators to evaluate pipe replacement programs for long term consistent and programmatic approach for the ongoing prioritization of our safety investment needs. This is illustrated in the replacement program distribution chart that we placed on the right hand portion of that slide. As I said before, Slide 31 is a new slide to help demonstrate the ongoing long term capital investment we forecast for the electric utilities beyond 2022.
We anticipate an ongoing annual investment need of $120,000,000 to $140,000,000 within our electric utilities to ensure a safe and reliable system and of course, to meet forecasted customer growth within our electric jurisdictions. Again, this run rate does not include larger projects like generation, renewables or similar type projects. Slide 32 provides our regulatory update for our utilities highlighting the status of our active rate reviews and federal income tax reform dockets by each state. We recently completed the rate review filing in Arkansas and we've completed the process of determining the customer benefits resulting from federal income tax reform in 6 states And we expect to file in Wyoming later this year. Slide 33, We have 3 different states in which we own multiple distribution utilities.
Those are Colorado, Nebraska and Wyoming. We strongly believe that consolidation of multiple entities within each state will provide long lasting benefits for all of our stakeholders. Consolidation will simplify the customer billing process and improve how we deliver customer service through fewer tariffs we have to manage. Having fewer jurisdiction entities reduces our risk, our complexity and the quantity of rate reviews, regulatory filings and other reporting requirements. And it will also help us streamline corporate processes and provide a one time tax benefit.
The timing for our consolidation request in each state will be driven by the need to file a rate review in that particular state. So as a result, the timing will vary between our states. On the bottom of the slide, we lay out the 3 states on our current status and our plans regarding the required steps and the timing for consolidating our gas distribution utilities in each of those states. Colorado was of course our first state and we have received approval for the legal we seek to achieve there and we intend to file a consolidated rate review for our gas utilities there in Q1 of next year. Wyoming will likely follow next in late 2018 2019.
And with the extension of the system safety integrity rider for Brassica gas distribution, which we announced last week, we don't see the consolidation effort beginning there probably until late 2019 or early 2020. Moving to Slide 34. We continue to be extremely proud of our track record of annual dividend increases, including stronger increases the past several years, reflecting our confidence in strong future earnings and cash flow growth. We increased the quarterly dividend by 6.3% last week. Over the past several years, we have delivered strong dividend increases while remaining within our targeted 50% to 60% dividend payout ratio.
On Slide 35, we focus on every day on operations. Our safety performance continues to be excellent. Our South Dakota Electric Utility was recently recognized for its excellent safety performance and was awarded the South Dakota Governor's Meritoris Achievement Award in Occupational Safety. Also, our Nebraska employee team was recently recognized for their extraordinary volunteer service and were selected as the winners of the 2018 Serve Nebraska Step Forward Corporate Community Volunteer Award. And as Dave mentioned earlier, we're also very proud to have recently won the opening bell at the New York Stock Exchange to help celebrate our 130 135th year of serving customers.
And as always, Slide 36 contains our 2018 scorecard. This is our way of holding ourselves accountable to you, our shareholders. We continue to make great progress toward our key 2018 goals. That concludes my remarks, and we're happy to entertain questions.
And our first question will come from the line of Julien Dumoulin Smith with Bank of America Merrill Lynch. Your line is now open.
Hey, good morning. Good
morning, Julien.
Hey, congratulations to both of you. It's been a pleasure and I look forward to it, Lynn. Perhaps just to kick off the questions here, I mean impressive shift here in the minimal lag bucket. Can you talk a little bit about the riders? It looks like there's a couple of 100,000,000 increase in total bucketed towards that minimal lag across your different gas utilities?
And then maybe let me also lay it out. I'm curious on the Wyoming electric strategy, given the uptick in CapEx there, contrasted against the rate case stay out to 'twenty one at
this point?
Talking about your minimal lag, Julian, yes, we have increased that capital spending. That goes through our long term programmatic spending that we're working with our regulators on and with our teams to ensure we have a safe system going forward as their system ages and as we replace certain parts of our pipeline. We're very focused on that opportunity to invest in that particular area. I didn't catch the last question.
In Wyoming, increased CapEx at Wyoming Electric.
Yes. How do you what's the recovery plan given the stay out?
Well, we'll be obviously likely to file a case there in mid-twenty 21 as required by the stipulation. So it's all setting up toward that.
Yes. And obviously, we didn't break down when that capital would be spent, Julien, somewhere in that 5 year timeframe, but certainly we're cognizant of when the next rate review will be scheduled and heavy spending there related to growth today. And then some of the more reliability type spending probably occur a little bit later, a little closer in timing to the rate review, but trying to spread that work out as we can.
Sorry, let me come back to the minimal lag just to clarify a little bit. Are there new mechanisms? Are you shifting capital to different jurisdictions to ensure minimal lag? What drove such a meaningful increase? And just making sure I didn't miss something on the regulatory front or if there's a shift in where you're spending?
Well, Julian, in Kansas, for example, we have the essentially double our spending in Kansas due to legislation that was passed there. So that's part of it. And then Nebraska, we had the was extended for another year as well. So those two states, we still continue to invest in. And the rest of it is, yes, focusing on that programmatic plan.
So no new riders in those particular states, but continue focused on the programmatic spending in those states.
Yes. If you recall in the previous couple of quarters, we've talked about working with our various states to at least inform them of our long term plans for a more programmatic approach to routine line replacement for some of our older materials and things like that. We've had the opportunity to have some visits with commissions and staffs and at least outline our preliminary plans. Those aren't something that we can get a pre approval for, but we wanted to make sure they were aware of what those plans were before we really announced the change in spending focus to really deal with some of those issues, particularly some of the older materials as they age, want to make sure we're way ahead of those from a safety perspective. Now that we've had those conversations, obviously, that was a big driver of the additional couple of $100,000,000 in spending.
One thing
to add to that, the minimal lag as we define it isn't just riders, obviously, it's capital that's spent that then leads into a rate review, Julien.
Excellent. And just quick just to clarify, what AFFO to debt are you solving for with the new ATM? Just where does that put you in the metrics? I know you've had some changes on your the metrics themselves.
Yes. Obviously, we want to stay in the mid teens. And as we work through this plan period, we're headed toward the upper teens, Julian.
Got it. All right. Excellent. I'll leave it there. Thank you all and best of luck again.
Thank you, Julian.
Thank you. And our next question will come from the line of Michael Weinstein with Credit Suisse. Your line is now open.
Hi, congratulations, Dave and Lynn.
Hi, Michael.
Hey, David. I'm just curious, do you have any other plans to move on to something else at this point or is this really a true retirement situation?
No, I don't have any other plans. My plans are really to play more and work less. So I think the transition here with the Executive Chair role is kind of a good way to ensure that that happens. But I'm after 15 years in the role, which is a long time relative to the tenure of most public company CEOs, it seems like it's time to focus more on fun and a little less on work after a lot of years of working very, very full time. So no other particular plans other than to enjoy and play.
Got you. Sounds like a good plan. On the new slides 3031, that's the recurring CapEx and that's not intended to be the full amount of CapEx that is represented on Slide 27. Is that is there can you quantify that as a percentage of the usual full amount for each year?
Well, those two new slides really are just for 2023 beyond. We have the details for 'eighteen through 'twenty two on the 2 earlier slides. And then the 'twenty three and beyond, the numbers Lynn referenced, the 225 to 250 for gas and the 120 to 140 for electric, that does not include any major items. That's just the ongoing spend to keep up the reliability and safety of the system. But I think what it indicates is we've got a really strong investment program just to keep up with the massive system that we have going forward.
And there's a lot of upside opportunity on top of that for those major pipeline projects, power generation, renewables, etcetera.
And do you still expect to have like 1 or 2 of those a year, roughly the $50,000,000 range each
kind of thing? Yes. We're working on a lot of them. It's just it's hard to control the timing sometimes on those. But if you look back over history, we've had several almost every year.
We've always got a bunch of them that we're working on and just the appropriate timing and when they're needed and some of those things. But our intent is to always have quite a few of those irons in the fire at any given point in time.
Hey, one last question on the Wyoming settlement. How does this affect and sorry if I just missed this, but how does this affect the YGEN I consideration for rate base possible rate basing at some point?
Well, our intent is to file our integrated resource plan by the end of the year and that should clear that up, I guess.
Yes, it doesn't affect our opinion related to that asset at all. Really all it does is just clean up the remaining contract period. We had a dispute with some of the industrial interveners about the way the escalation clauses work and then there were some other issues related to couple of years of prior PCAs that were in dispute. So it really just cleans all that up and basically ensures that we're not going to fight over it for the remaining life of the contract. Hopefully, we resolve the issue through our resource planning process well in advance of the expiration of the contract.
We'll see how that process plays out. But as Rich said, we should file it before the end of the
year. Can you briefly identify like just how much EPS is coming from that one contract? Like in other words, how much would be how much how would this affect finances if it was not rate based and the contract simply expired?
Well, we haven't disclosed specifically what that contract provides in terms of EPS, Mike. But I think the way you can think of it is for the next through the end of 2022, it's escalating at 3%. So that contribution will continue. And then as Dave mentioned, we'll see how the IRP process plays out.
Yes, there's only 2 assets in our Power Gen business. This and the Colorado plant and we show that adjustment for the other 50% of that Colorado IPP plant. So you can use how much that Colorado IPP is of total Power Gen earnings. And then when you look back into what YGEN Yes. One thing we're pretty comfortable with though is the value of YGEN-one to the customers of Cheyenne Light.
Whether that's through rate based contracting or whatever, that's an extremely low cost, very high availability resource. So the likelihood of that plant not running is extraordinarily low. It's a fantastic resource for the long term and we're pretty confident in that. We just have to work our way through that process.
Our next question will come from the line of Chris Ellinghaus with Williams Capital. Your line is now open.
Hey, guys. How are you?
Hey, good morning, Chris. Good morning.
Congratulations to the job switchers.
Thank you. Rich,
the Wyoming credit, should we expect, A, that, that will be roughly evenly spread over the multiple years? And would you expect to accrue that in the same quarter each year?
No. Here's the detail on that, Chris. We had a reserve reserves booked prior to this quarter of about $2,000,000 associated with that. We reached the settlement in the Q3. We actually recorded about $3,100,000 pre tax, which was predominantly the revenue credits we talked about in our comments and then there were a few other smaller items.
And then in the Q4, we will record another $1,500,000 associated with that and then $500,000 each in 2019 2020.
Okay. Great. That helps a lot. The Push Ranch 1 acquisition, how should we think about returns on that?
Yes. I think you can kind of
think of them as maybe slightly better than utility. It's was a PPA contract basically that we bought out. So most of it's going to come through the tax credits. That's right.
Okay. And with this increased CapEx and with the sort of flipping of the balance sheet with the unit conversion, have you got sort of a target for what you're you'd like the balance sheet to look like going forward?
Yes. We want to get where our debt to total cap is more
in the mid-50s, but that's not
going to happen right away given the strong CapEx program that we disclosed. Obviously, we're sprinkling a little bit of equity in now given the increased CapEx to help with that balance sheet rightsizing, if you will. But by the end of the 5 years, we'd like to be back to the mid-50s. We'll work our way there kind of, I wouldn't say linearly, given that large CapEx in 2019, but we'll work our way there over the next few years.
Okay, great. Thanks for the details guys.
Thank you. Thanks, Chris.
Thank you. And our next question will come from the line of Vedula Mehtri with Avon Capital. Your line is now open.
Hi. Good morning, guys.
Good morning, Vedula.
And congratulations on your retirement and your plans to have fun.
Yes, thank you.
Wondering, following up on Mike Weinstein's question. Right now, what is on the balance sheet, what is the carrying value of YGen 1?
Well, that's disclosed. I don't know the exact number off the top of my head, but it's in our 10 ks that we filed in February. And obviously, there'd be a little depreciation off that net book value right now. We can look that up here, but
Yes, it's pretty well spelled out
in the K. It is.
Just wondering, do you have a number approximately? I can look it up obviously if I have to, but
We'll find it here and answer here shortly.
Okay. And I guess then where I'm going with this then is, right now with the power sales contract, does the power sales contract provide a utility type rate of return? Or is it kind of a below utility type rate of return that will by the end of the contract achieve utility type rate return? Can you kind of describe that?
It provides a pretty good return. I mean that contract was entered into clear back in 2000 and 2, I think it was started in 2003 with that plant and it's escalated and things along that period. Returns are pretty solid, I'd say at or probably a little above utility returns, as you would expect from an IPP project.
Okay. And you can follow-up with me on offline or if you find that number while we're still having this call, I'd appreciate it. Thank you very much.
Thank you. Thank you, Vedula.
Yes, and we can answer that question. The K, Madula just indicates the net book value of YGen 1 at December 31, 2017 was 69,000,000 dollars So there's a little depreciation off of that for 9 months.
Thank you. And our next question will come from the line of Andrew Rizzo with Scotiabank. Your line is now open.
Hey, guys. Also want to pass congratulations to everyone and for all the positive regulatory updates recently. It's been a busy stretch for you guys. Just have two quick ones here. First on the dividend, obviously, you increased it recently a little over 6%.
You've got the comment targeting 50% to 60%. Just want to be sure, how do you think about the other comment in the slide about increasing the dividend during periods of slower EPS growth? Does that imply that maybe we'll see a deceleration in the dividend growth as EPS starts to accelerate or maybe just kind of thoughts on the trajectory there?
Well, obviously we're not going to comment on what the Board might do with future dividends, but our intent is to not decrease the level of increase as you look forward. We've increased it $0.12 each of the last 2 years and $0.10 the year prior to that. One change we've made is to typically do it now this time of year as opposed to after the 1st of the year. Again, we'll see conversations with the Board on that next year, but the intent would be not to decrease the level of increase.
Okay, got it. Thanks. Then just maybe just a little technical one, but the Nebraska Safety and Integrity rider that is now going through the end of 2020, If I understood it correctly, it only covers historical spending. So how would recovery for spending from 2018 through 20 20 be recovered? Would that be through a rate case?
And does that fold into the consolidation? Or is that a separate issue altogether?
Yes, the short answer to your question is yes. It will be primarily covered through rate cases.
And then our intent, and I think this has been outlined previously is we'll file for the consolidation cases when the entities combined would need a rate review. So that's what happens when we talked about the rider extension basically puts us out into that 2020 timeframe, maybe late 2019 timeframe to start that process. And so any capital spending between now and then that is not covered by the rider or is not growth related and pays for itself as we go, then we'll be rolled into that consolidation rate case down the road. We do have 2 entities there and that rider extension only covers the former source gas territory. So we have some other mechanisms in place for our legacy Nebraska Gas Utility also.
Got it. Thank you very much. Thank
you. Thank you.
There are no further questions. David Emery, please proceed to closing remarks. Yes.
Thank you. We certainly appreciate everyone's time and attention today. As I said at the beginning, I think we had a great quarter. And Andrew just mentioned it, but our regulatory success has been really good. We've got an excellent team, puts a lot of time and effort in with our regulators to make sure we achieve great regulatory results.
It's truly one of our core strengths and something that we look forward to continuing to execute on going forward. We've got a lot of activity coming up. We We expect to do an excellent job on those regulatory filings just like we have these that we've achieved recently. With that, that's kind of the end of our comments for today. Thanks a lot for your time and attention and your interest in Black Hills.
Have a great rest of your day. Thank you.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.