BLACK HILLS CORP annual report, FY2020

Black Hills Corporation — 2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter earnings report. Black Hills operates regulated electric and gas utilities, power generation, and coal mining businesses, serving approximately 1.3 million customers across eight states.

Financial performance and position

Metric20202019
Revenue$1.697 billion$1.735 billion
Operating income$428.3 million$406.0 million
Net income available to common shareholders$227.6 million$199.3 million
Diluted earnings per share$3.65$3.28
Cash from operating activities$541.9 million$505.5 million
Capital expenditures$755.4 million$849.8 million
Long-term debt, net of current maturities$3.528 billion$3.140 billion
  • Revenue decreased about 2%, while operating income rose about 5% and common earnings rose about 14%. Diluted EPS increased from $3.28 to $3.65.
  • Electric Utilities gross margin, a non-GAAP measure, was $447.0 million, up from $444.5 million. Gas Utilities gross margin was $620.0 million, up from $584.1 million. Gas Utilities operating income increased $25.9 million, chiefly from new rates, customer growth, and rider revenues.
  • Operating cash flow increased $36.4 million. Capital expenditures remained substantial; cash and cash equivalents were $6.4 million at year-end.
  • Year-end notes payable were $234.0 million, current maturities of long-term debt $8.4 million, and long-term debt $3.528 billion. The company reported a 60% total debt ratio and 58% long-term debt ratio; it was in compliance with debt covenants. Available revolving-credit capacity was $491 million, producing reported year-end liquidity of $498 million including cash.
  • The Board declared a 2021 quarterly dividend of $0.565 per share, or $2.26 annualized. The 2020 dividend payout ratio was 60%.

Material changes versus 2019

  • Gas Utilities’ adjusted operating income increased to $215.9 million from $190.0 million, while Electric Utilities’ declined to $156.1 million from $160.3 million. Power Generation income fell to $42.1 million from $44.8 million; Mining income was broadly stable at $12.8 million.
  • Consolidated operating income and net income improved despite lower revenue. Lower gas commodity costs reduced reported revenue and cost of sales; management also cited increased gas gross margin from rate changes, growth, and other factors.
  • Interest expense increased $5.8 million, primarily due to higher debt balances, partly offset by lower rates. A non-cash impairment of an oil-and-gas investment was $6.9 million, versus $19.7 million in 2019; $1.5 million of carrying value remained.
  • 2020 capital spending was below 2019, which included major pipeline, wind, and transmission projects. The company issued $400 million of 2.50% senior notes due 2030 and approximately $99 million of common stock in February.

Outlook, management commentary, and risks

  • Management forecasts approximately $2.7 billion of capital investment over 2021–2025, including $647 million in 2021. It expects to fund investment with operating cash flow, credit facilities, commercial paper, and $100–$120 million of common stock issuance through the ATM program. The filing does not provide a clear earnings or EPS guidance range.
  • The company announced emissions goals: reduce electric-utility GHG emissions intensity 40% by 2030 and 70% by 2040, and reduce gas-utility GHG emissions 50% by 2035, measured against stated 2005 baselines. A Colorado solar program plans up to 200 MW by the end of 2023; the Corriedale 52.5 MW wind project entered service in November 2020.
  • Subsequent event: Extreme February 2021 cold drove natural-gas purchases approximately $600 million above forecast base load through February 24; the estimate excludes certain pipeline charges still subject to settlement. To fund purchases and provide liquidity, the company entered an $800 million unsecured term loan due November 23, 2021. Regulatory mechanisms may permit cost recovery, but management expects heightened regulatory review. As of February 24, reported liquidity was $1.3 billion.
  • COVID-19 had limited net financial impact in 2020, according to management. Effects included lower commercial and transport volumes, waived late fees, higher bad-debt expense and essential-worker costs, partly offset by higher residential usage and reduced travel and training. The company increased its credit-loss allowance by $3.3 million.
  • Key risks include regulatory decisions and recovery timing, climate and environmental rules affecting fossil-fuel assets, weather and commodity-price volatility, customer arrears, operational disruptions, cyberattacks, and access to capital. The company’s investment-grade ratings were BBB+ from S&P and Fitch and Baa2 from Moody’s, all with stable outlooks.
  • Environmental and contract matters include two active former manufactured-gas-plant sites, approximately $13 million accrued for mine reclamation, and a Wyodak coal-supply contract with PacifiCorp expiring in December 2022; extension negotiations were ongoing. A proposed regional-haze resolution involving operating limits and low-NOx burners remained subject to public comment and regulatory approval.

Most important facts for investors to verify

  • How much of the approximately $600 million February 2021 incremental gas-purchase cost and related pipeline charges will be recovered, over what period, and with what impact on customer bills and cash flow.
  • Repayment and refinancing plans for the $800 million term loan due November 2021, and liquidity, covenant, and credit-rating effects.
  • Whether the planned capital program and equity issuance remain on schedule, and whether regulatory approvals allow timely recovery and returns on investment.
  • Progress on Colorado Gas rate rehearing and safety-rider proceedings, Nebraska Gas rate implementation, and the Wyodak coal-contract extension.
  • Whether customer collections, bad debt, environmental requirements, or climate-related policy changes materially alter earnings, cash flow, or asset values.