Black Hills Corporation — Q1 2018 Form 10-Q
Business context and period. This quarterly report covers the three months ended March 31, 2018, compared with Q1 2017. Black Hills operates regulated electric and gas utilities, power generation, and coal mining businesses in the United States. Oil and Gas is reported as discontinued operations following the decision to divest the segment.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $575.4 million | $547.5 million |
| Operating income | $148.3 million | $150.2 million |
| Income from continuing operations available to common shareholders | $135.3 million | $78.1 million |
| Net income available to common shareholders | $133.0 million | $76.5 million |
| Diluted EPS, continuing operations | $2.50 | $1.42 |
| Diluted EPS, including discontinued operations | $2.46 | $1.39 |
| Cash from operating activities | $169.9 million | $146.8 million |
| Property, plant and equipment additions | $70.0 million | $66.5 million |
Revenue increased about 5.1%, while operating income declined about 1.3%. Operating margin was approximately 25.8%, compared with 27.4% in Q1 2017. Operating cash flow less property, plant and equipment additions was approximately $99.9 million, versus $80.4 million.
Earnings quality: The income tax line was a $25.8 million benefit, compared with $34.4 million of expense in Q1 2017. Q1 2018 included a $49 million deferred tax benefit from legal-entity restructuring involving tax-amortizable goodwill. The filing also reports approximately $15 million of revenue reserved for expected customer benefits from the lower federal tax rate. The substantial year-over-year earnings increase therefore was not solely an operating improvement.
Material changes and segment performance
- Gas Utilities: Continuing-operations income available to common stock rose to $107.6 million from $46.0 million, principally reflecting the $49 million restructuring-related tax benefit and colder weather. Gas gross margin increased $4.1 million; the company cited a $9.1 million favorable weather impact, partly offset by a $9.1 million TCJA-related revenue reserve.
- Electric Utilities: Income fell to $19.8 million from $22.2 million. Higher operating and maintenance expense and a $6.1 million TCJA-related revenue reserve weighed on results, partly offset by colder weather and higher rider revenues.
- Power Generation: Income available to common stock declined to $5.9 million from $6.5 million, reflecting lower generation sales and higher depreciation.
- Mining: Income edged up to $3.0 million from $2.9 million; coal tons sold increased 3% and revenue per ton was $15.89 versus $15.78.
- Oil and Gas discontinued operations: The segment recorded a $2.3 million loss, versus a $1.6 million loss. By May 4, 2018, agreements had been executed or sales completed for approximately 96% of properties; remaining asset sale agreements were expected by mid-2018. No additional held-for-sale valuation adjustment was recorded in Q1.
Financial position, liquidity and capital
- At March 31, 2018, cash and cash equivalents were $30.9 million and restricted cash was $3.0 million. Current assets were $492.1 million against current liabilities of $788.6 million.
- Long-term debt was $2.859 billion and current maturities of long-term debt were $255.7 million, including $250 million of senior notes due January 2019. Commercial paper outstanding was $164.2 million; its weighted-average rate at quarter-end was 2.34%.
- The $750 million revolving credit facility and commercial paper program had $570 million of reported available capacity at quarter-end, after $164 million of commercial paper and $16 million of letters of credit. The company reported compliance with its debt covenant: indebtedness-to-capitalization was 59%, against a maximum of 65%.
- Capital expenditures were approximately $70 million in Q1. Planned capital expenditures are $442 million for 2018, $566 million for 2019, and $406 million for 2020. Plans include the Busch Ranch II wind project.
- Common dividends paid were $0.475 per share for the quarter. The board declared another $0.475 quarterly dividend, payable June 1, 2018; the stated annualized rate was $1.90 per share.
Outlook, management commentary and risks
- Management said cash on hand, operating cash flows, borrowing capacity, and access to debt and equity markets were expected to fund operations, debt maturities, dividends, and planned capital spending. No explicit full-year earnings guidance is provided in the filing text.
- The company estimated that the lower federal tax rate would reduce annual cash flows by approximately $35 million to $45 million for the next several years. The amount and timing of customer rate reductions or other TCJA benefits remain subject to regulatory decisions.
- Utilities continued charging existing tariff rates while regulators reviewed the tax-rate impacts; the related Q1 revenue reserve was approximately $15 million. A proposed RMNG settlement would provide $1.1 million of annual revenue increases and extend its safety and integrity cost-recovery rider, subject to regulatory approval; new rates were expected June 1, 2018.
- Colorado Electric received approval for a 25-year, 60 MW wind power purchase agreement. The approximately $71 million Busch Ranch II project was expected to enter service by the end of 2019. South Dakota Electric began construction of a $70 million, 175-mile transmission project, with the two segments expected in service in 2018 and 2019.
- Results are seasonal: gas utility revenue and margins are concentrated in the first and fourth quarters, while electric demand typically peaks in summer. Weather, commodity prices, regulatory actions, capital needs, and counterparties’ collateral requirements could affect results or liquidity. Management reported sufficient liquidity for potential collateral postings at quarter-end.
- S&P affirmed the company’s BBB rating and revised its outlook to Positive. Moody’s rated it Baa2 Stable and Fitch rated it BBB+ Stable. The company reported no material changes to previously disclosed risk factors or contingencies.
Important facts for investors to verify
- How much of reported earnings growth reflects the one-time $49 million tax benefit, and what is the expected ongoing earnings and cash-flow effect of tax reform?
- How and when will regulators return tax benefits to customers, and how will that affect utility revenues, regulatory balances, and working capital?
- Can Black Hills execute its planned capital program while managing the 2019 note maturity and maintaining covenant headroom, liquidity, and dividend payments?
- Are the remaining Oil and Gas asset sales and related liability settlements completed on the anticipated timetable and without further valuation adjustments?
- What are the eventual cost, timing, and regulatory recovery for the wind and transmission projects, and how sensitive are results to weather and utility demand?