Black Hills Corporation — FY2019 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2019; it is not a quarterly report. Black Hills is a regulated electric and natural gas utility holding company, serving approximately 1.3 million customers across eight states, with supporting power generation and coal mining businesses.
Financial results and position
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Operating revenue | $1.735 billion | $1.754 billion | Down 1.1% |
| Operating income | $406.0 million | $397.0 million | Up 2.3% |
| Net income available to common shareholders | $199.3 million | $258.4 million | Down 22.9% |
| Diluted EPS | $3.28 | $4.66 | Down 29.6% |
| Cash provided by operating activities | $505.5 million | $488.8 million | Up $16.7 million |
| Capital expenditures | $849.8 million | $502.4 million | Up $347.3 million |
Margins and segments. Non-GAAP gross margin increased to $444.5 million for Electric Utilities from $427.6 million, and to $584.1 million for Gas Utilities from $563.2 million. Adjusted operating income rose to $160.3 million in Electric Utilities, $190.0 million in Gas Utilities, and $44.8 million in Power Generation; Mining fell to $12.6 million from $16.3 million. Consolidated operating margin was approximately 23.4% of revenue versus 22.6% in 2018.
Cash flow and liquidity. Operating cash flow less property additions was approximately negative $312.9 million. Cash and cash equivalents were $9.8 million at year-end; current assets were $473.2 million against current liabilities of $811.3 million. The $750 million revolving credit facility and commercial paper program had $370 million of available capacity after $350 million of short-term borrowings and $30 million of letters of credit. Management stated that cash, operating cash flow, borrowing capacity, and access to capital markets were expected to meet requirements.
Debt and capital. Notes payable were $349.5 million and long-term debt, including current maturities, had a carrying amount of approximately $3.146 billion. The company reported a 60% total debt ratio and 57% long-term debt ratio. In October 2019, it issued $700 million of senior notes—$400 million at 3.05% due 2029 and $300 million at 3.875% due 2049—using proceeds to repay a $400 million term loan, retire $200 million of 5.875% notes due 2020, and reduce short-term debt. It also issued about $99 million net through its at-the-market equity program.
Material changes and unusual items
- Net income declined despite higher operating income and utility gross margins. The comparison was affected by a $73 million tax benefit from legal-entity restructuring recorded in 2018; 2019 included a $19.7 million pre-tax, non-cash impairment of a privately held oil and gas investment.
- The company expensed $5.4 million of development costs for projects it no longer plans to construct. 2019 tax expense was $29.6 million, compared with a $23.7 million tax benefit in 2018.
- Average diluted shares increased to 60.8 million from 55.5 million, partly reflecting the 2019 ATM issuance, contributing to the per-share comparison.
- Capital spending rose substantially, particularly for gas utility safety, reliability and integrity work, wind projects, a transmission line, and the Natural Bridge pipeline. Total assets increased to $7.56 billion from $6.96 billion.
- Coal sales fell 9% to 3.716 million tons, primarily due to generation plant outages. The Wyodak coal contract price was reset to $17.94 per ton effective July 1, 2019, down from $18.25; its contract expires in 2022 and renewal discussions are underway.
Outlook, risks and contingencies
- Investment and growth: Management estimated approximately $2.7 billion of capital investment over 2020–2024, including $669 million planned for 2020. Priorities include utility infrastructure modernization, safety and reliability, customer growth, and renewable resources.
- Renewables: The $79 million Corriedale wind project, planned for service by year-end 2020, is intended to supply the Renewable Ready program. Colorado Electric was also evaluating proposals for up to 200 MW of renewable energy resources. The company targeted a 50%–60% dividend payout ratio; the 2019 payout ratio was 63%. The January 2020 declared annualized dividend rate was $2.14 per share.
- Regulation: Utilities rely on regulatory approval and cost-recovery mechanisms; commissions may disallow costs or require refunds. A Colorado Gas administrative law judge recommended denying territory consolidation and reducing rates; the company filed exceptions, with a CPUC decision expected by March 2020. Wyoming Gas’s approved statewide rates were expected to add $13 million of annual revenue beginning March 2020.
- Environmental and operating exposures: A potential EPA Regional Haze requirement at the Wyodak Plant could require approximately $27 million of investment for Black Hills’ 20% share if specified controls are required; proceedings were ongoing. Other risks include evolving emissions and pipeline regulations, severe weather, outages, commodity and interest-rate movements, cyberattacks, and customer usage changes.
- Other commitments: The filing disclosed $761.4 million of unconditional purchase obligations, mainly for power, transmission, gas transportation and storage, plus $64.2 million of asset retirement obligations. Iowa manufactured-gas-site remediation estimates ranged from $2.6 million to $10 million, with $2.6 million accrued. The 2019 financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash flow and financing availability can sustainably support the elevated capital program, dividends, and debt service.
- Progress and rate recovery for planned utility investments, including the Corriedale project and 2020 capital expenditures.
- Resolution of Colorado Gas’s rate proceeding and any required Wyodak environmental controls and related costs.
- Renewal terms for the Wyodak coal supply contract expiring in 2022, and the status of the proposed long-term Wygen I power agreement.
- Whether earnings comparisons normalize after the 2018 tax benefit, 2019 investment impairment, project write-off, and higher share count.