Executive Summary / Key Takeaways

• Strategic Growth Engine: Black Hills Corporation (BKH) is poised for accelerated growth, targeting the upper half of its 4% to 6% long-term EPS growth rate starting in 2026, driven by a robust $4.7 billion capital plan and burgeoning data center demand.
• Innovative Capital-Light Model: BKH's unique tariff and market energy procurement model for data centers provides utility-like returns with minimal capital investment, a key differentiator that protects existing customers while capturing high-growth industrial load.
• Strong Financial & Operational Execution: The company reaffirmed its 2025 EPS guidance of $4.00-$4.20, demonstrating consistent regulatory success, effective O&M management, and a commitment to a 55-year dividend growth streak.
• Competitive Edge in Niche Markets: BKH leverages its vertically integrated structure, localized expertise, and favorable service territory attributes (e.g., Wyoming's climate for cooling) to attract and serve high-demand customers, positioning itself strategically against larger, more diversified peers.
• Mitigated Risks: Proactive wildfire legislation in Wyoming, minimal exposure to federal energy policy shifts, and disciplined expense management underscore a balanced approach to risk, enhancing long-term stability.

Setting the Scene: A Legacy of Energy and Strategic Evolution

Black Hills Corporation, with roots stretching back 141 years to the 1883 South Dakota gold rush, has evolved into a customer-focused energy solutions provider serving over 1.35 million natural gas and electric utility customers across eight states. This long history has shaped a core strategy centered on operational excellence, transformation, and growth, underpinned by a deep commitment to safety and reliability. The company operates as a vertically integrated utility, a foundational strength that allows it to manage both generation and distribution, offering a unique competitive posture in its predominantly rural Rocky Mountain and Midwestern service territories.

In the competitive utilities landscape, Black Hills Corporation holds a mid-tier market position, typically capturing 5-10% market share within its operating regions. Direct competitors like Xcel Energy (XEL), Evergy (EVRG), NiSource (NI), and Ameren (AEE) often boast greater scale and broader geographic footprints. For instance, Xcel Energy, a larger peer, exhibits higher revenue growth (6-8% annually) and stronger profitability margins (gross margins 45-50%, operating margins 15-18%) compared to BKH's 4-6% revenue growth and TTM gross margins of 31.30% and operating margins of 23.48%. Xcel's aggressive pursuit of renewable integration and advanced grid modernization also positions it ahead in certain technological aspects. Similarly, Evergy's focus on cost efficiency, reflected in its 5-7% revenue growth and gross margins of 50-55%, presents a challenge to BKH's pricing power.

However, BKH carves out its competitive niche through several key differentiators. Its deep local presence and community-oriented approach foster strong customer loyalty, particularly in underserved areas. The company's vertically integrated model provides flexibility and control over its energy supply chain. Critically, BKH's agility as an organization allows it to develop and implement innovative, customized solutions for specific customer needs, a capability that larger, more bureaucratic utilities may struggle to match.

Technological Edge: The Capital-Light Data Center Model

A cornerstone of Black Hills Corporation's strategic differentiation and a significant competitive moat is its innovative "capital-light" or "minimal capital" service model, particularly for its hyperscale data center and blockchain customers. This model, honed over a decade of serving clients like Microsoft (MSFT) and now Meta (META), fundamentally reshapes how BKH captures high-growth industrial demand. Instead of requiring substantial upfront capital investments in new generation assets, BKH leverages approved tariffs (such as Wyoming Electric's Large Power Contract Service (LPCS) Tariff and Blockchain Interruptible Service (BCIS) Tariff) to procure energy directly from the market.

This approach offers several tangible and quantifiable benefits. It generates "utility-like earnings" for BKH, comparable to what would be achieved by building new generation, but without the associated balance sheet strain or regulatory lag. This minimizes capital expenditure, allowing BKH to allocate resources to other critical infrastructure projects. Crucially, it protects BKH's broader customer base from the financial risks of stranded assets, as the costs and risks of serving these large, specialized loads are largely borne by the data center customers themselves through negotiated market-based rates. The model also provides "valuable speed-to-market advantages" for data center customers, enabling rapid deployment and expansion of their operations, a critical factor in the fast-paced technology sector.

Beyond this innovative service model, BKH is also investing in advanced generation technology. The 99-megawatt Lange II project in South Dakota, approved in June 2025 and commencing construction in Q3 2025, exemplifies this. This facility will utilize modern natural gas-fired reciprocating internal combustion engines. These engines offer significant operational advantages: they are highly dispatchable and responsive, capable of ramping up to full load in as little as five minutes. Furthermore, they provide "black start capabilities," enhancing grid resiliency by enabling the restoration of power without external assistance after a blackout. This technological upgrade addresses capacity deficits from retiring aging units and supports increased planning reserve margins, ensuring reliable energy supply for all customers, including the growing industrial load.

The "so what" for investors is clear: BKH's capital-light model for data centers is a powerful competitive advantage. It allows the company to participate in the high-growth tech sector with reduced financial risk, driving revenue growth (Electric Utilities revenue grew 7.62% in Q2 2025 and 7.21% in H1 2025) and contributing significantly to EPS (expected to exceed 10% of total EPS by 2028). This innovative approach, combined with strategic investments in flexible, modern generation like Lange II, positions BKH to capture future demand efficiently and profitably, differentiating it from peers who may rely solely on traditional, capital-intensive utility expansion.

Operational Prowess and Growth Catalysts

Black Hills Corporation's operational performance consistently underpins its growth narrative. The company boasts an industry-leading reliability record, with all three of its electric utilities ranking in the top quartile for reliability over the three-year average through 2023. This operational excellence is evident in its low vegetation-caused outage rate of just 3.5%, significantly better than the 20% industry average. This reliability is a critical draw for high-demand customers like data centers, for whom uninterrupted power is paramount.

Customer growth remains a robust organic driver, with the company's customer count increasing by over 1% annually on average over the last five years, more than double the national average. This growth is particularly strong in Arkansas and Colorado, where population growth in BKH's service territories is nearly triple the state averages. Wyoming Electric, a key beneficiary of tech-driven demand, recorded four new all-time peak loads in the first half of 2025, with the June 2025 peak of 379 megawatts representing a 21% increase over the 2024 peak and a 10% increase over the prior Q2 peak.

The company's strategic capital plan is designed to capitalize on this growth. The updated five-year capital investment plan for 2025-2029 totals $4.7 billion, a substantial 10% increase (over $400 million) from the prior plan. This investment is focused on safety, reliability, and transformative infrastructure expansion. Key projects include:

• Ready Wyoming Transmission Project: This $350 million, 260-mile project is on track for completion by year-end 2025. It will enhance system resiliency, reduce reliance on third-party transmission, and increase access to market energy and renewables, supporting long-term price stability for customers.
• Lange II Generation Project: The 99 MW natural gas-fired facility in South Dakota, with construction starting in Q3 2025 and in-service by H2 2026, will replace aging generation and bolster planning reserve margins.
• Colorado Clean Energy Plan: Approved in 2024, this plan includes 350 MW of renewable resources (100 MW utility-owned solar, 50 MW utility-owned battery storage, 200 MW solar PPA) to achieve an 80% emissions reduction by 2030. These utility-owned investments are integrated into the 2026-2028 capital plan.

BKH's proactive regulatory strategy is crucial for recovering these investments. The company maintains a cadence of 3 to 4 rate reviews annually, having completed seven reviews since early 2024, recovering over $1.3 billion in new system investments. Recent successes include Kansas Gas receiving approval for $10.8 million in new annual revenue effective August 1, 2025, and Nebraska Gas filing for $34.9 million in new annual revenue, with interim rates effective August 1, 2025, and final rates expected by Q1 2026. Colorado Electric also saw its rate increase adjusted to $17.5 million after a rehearing request. These regulatory wins ensure timely cost recovery and support the company's financial health.

Financial Health and Performance

Black Hills Corporation's recent financial performance reflects the successful execution of its strategy. For Q2 2025, the company reported $0.38 EPS, up from $0.33 in Q2 2024. Year-to-date Q2 2025 EPS reached $2.24, compared to $2.19 in the same period last year. This growth was primarily driven by new rates, rider recovery, and customer growth, which collectively generated $0.49 per share in new rates and rider recovery year-to-date.

Revenue trends are positive across segments. Electric Utilities revenue grew 7.62% in Q2 2025 and 7.21% in the first six months of 2025, while Gas Utilities revenue saw even stronger growth of 10.47% in Q2 2025 and 11.98% in the first six months of 2025. Operating income for Gas Utilities surged by 54.35% in Q2 2025 and 21.67% year-to-date, largely due to new rates, rider recovery, and favorable weather. While Electric Utilities operating income saw a slight decrease year-to-date due to higher operating expenses and unplanned generation outages, the overall impact on EPS was immaterial due to offsetting benefits.

The company maintains a strong focus on expense management. Despite approximately $5 million in additional pretax O&M costs year-to-date from unplanned generation outages (primarily at Wygen III and Pueblo Airport Generation), these were largely offset by benefits recognized in margin and non-controlling interest. Management expects to keep 2025 O&M costs to a compounded annual growth rate of approximately 3.5% of 2023 expense. Furthermore, insurance costs are projected to be flat year-over-year for the period of July 2025 through June 2026, providing a stable outlook for this expense.

BKH's balance sheet remains robust, a top priority for management. The company consistently meets its FFO to debt target of 14-15% and its net debt to total capitalization target of 55%, providing a healthy cushion above the 13% downgrade threshold. Liquidity is strong, with over $600 million available under its revolving credit facility. The company plans to issue $215 million to $235 million in new equity in 2025 to fund its capital plan, having already issued $65 million year-to-date. Importantly, annual equity needs are expected to be lower in 2026 and beyond as major capital projects begin to generate stronger operating cash flows. The company also plans to refinance $300 million of senior unsecured notes due January 2026, demonstrating proactive debt management.

A testament to its financial discipline and commitment to shareholder returns is BKH's industry-leading dividend track record, with 55 consecutive years of increases. The company targets a payout ratio of 55% to 65%, reinforcing its dedication to delivering long-term value.

Risks and Mitigation

While BKH's outlook is strong, key risks are actively managed. Wildfire risk, a growing concern for utilities, is being addressed through comprehensive mitigation plans. Wyoming's recent enactment of HB0192, providing material liability protections for utilities complying with commission-approved wildfire mitigation plans, sets a crucial precedent. BKH established an Emergency Public Safety Power Shutoff (PSPS) program across its electric utilities in June 2025 and is actively pursuing similar supportive legislation in Colorado and South Dakota for 2026.

Potential shifts in federal energy policy, such as those introduced by the One Big Beautiful Bill Act (OBBBA) and Executive Order 14315, are being evaluated. However, BKH does not anticipate material impacts on its existing clean energy generation facilities or the Colorado Clean Energy Plan, as the OBBBA does not repeal IRA tax credit transferability provisions for non-prohibited foreign entities. The company's strategic exposure to Inflation Reduction Act (IRA) changes is minimal, with less than $20 million in annual production tax credits and limited reliance on their transferability. Trade tariffs have not materially impacted operations or financial performance to date, with most 2025 capital project materials sourced domestically and foreign spend historically below 3%. Operational risks, such as unplanned generation outages, are mitigated through proactive maintenance and strategic investments in spare components, with all generation currently online and no unplanned outages assumed for the remainder of 2025.

Conclusion

Black Hills Corporation presents a compelling investment thesis rooted in its stable regulated utility operations, strategic growth initiatives, and innovative approach to high-demand industrial customers. The company's 141-year history underscores a deep-seated commitment to operational excellence and customer service, which continues to drive consistent performance. Its unique "capital-light" model for data centers, coupled with targeted infrastructure investments like the Ready Wyoming transmission project and the Lange II generation facility, positions BKH to capture significant growth opportunities while maintaining financial discipline and protecting its broader customer base.

With a reaffirmed 2025 EPS guidance of $4.00-$4.20 and confidence in achieving the upper half of its 4% to 6% long-term EPS growth target starting in 2026, BKH demonstrates a clear path to value creation. This outlook is reinforced by a robust $4.7 billion capital plan, strong organic customer growth, and a burgeoning pipeline of data center demand, which is expected to contribute over 10% to total EPS by 2028. The company's proactive regulatory strategy, prudent financial management, and industry-leading dividend track record further enhance its appeal. While operating in a competitive landscape, BKH's agility, localized expertise, and innovative service models provide distinct advantages, making it a resilient and attractive proposition for discerning investors seeking stable growth and dependable returns.