Black Hills Corporation — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Black Hills is a U.S. regulated electric and natural-gas utility holding company, with Power Generation and coal Mining segments. It served approximately 1.27 million utility customers across eight states. The Oil and Gas business was fully divested during 2018 and is presented as discontinued operations.
Financial performance and key metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Operating revenue | $1.754 billion | $1.680 billion |
| Operating income | $397.0 million | $416.7 million |
| Income from continuing operations attributable to common shareholders | $265.3 million | $194.1 million |
| Continuing-operations diluted EPS | $4.78 | $3.52 |
| Net income attributable to common shareholders | $258.4 million | $177.0 million |
| Total diluted EPS | $4.66 | $3.21 |
| Cash from operating activities | $488.8 million | $428.3 million |
| Capital expenditures, continuing operations | $502.4 million | $337.7 million |
- Revenue increased 4.4%, while operating income decreased about 4.7%. Higher operating and maintenance costs and depreciation contributed to the decline.
- Electric Utilities revenue was $711.5 million; its disclosed non-GAAP gross margin was $434.4 million, down from $436.2 million. Gas Utilities revenue was $1.025 billion; its non-GAAP gross margin was $563.2 million, up from $538.0 million.
- Gas Utilities common earnings rose to $160.3 million from $65.8 million, substantially reflecting a $73 million tax benefit from legal-entity restructuring, as well as colder winter weather and higher sales. This benefit is unusual and should not be treated as recurring operating growth.
- Power Generation common earnings fell to $20.8 million from $46.5 million, principally due to a planned Wygen I outage, higher maintenance and depreciation, and comparison with a prior-year tax benefit. Mining common earnings were $12.9 million versus $14.4 million.
- Fourth-quarter revenue was $501.2 million and net income attributable to common shareholders was $86.6 million, or diluted EPS of $1.49. Fourth-quarter continuing income included approximately $23 million of the tax benefit from legal-entity restructuring.
Debt, liquidity and shareholder returns
- At year-end, cash and cash equivalents were $20.8 million, with another $3.4 million of restricted cash. Notes payable, principally commercial paper, were $185.6 million; current maturities of long-term debt were $5.7 million; and long-term debt, net of current maturities and financing costs, was $2.951 billion. The filing reports a 59% total debt ratio, down from 66%.
- The $750 million revolving credit facility was extended to 2023. At December 31, 2018, there were no revolver borrowings, $22 million of letters of credit and $542 million of available capacity. The company reported covenant compliance.
- 2018 financing included a $400 million 4.350% senior unsecured notes offering due 2033, a $300 million term loan extended to 2020, and approximately $299 million of proceeds from conversion of Equity Units in exchange for 6.372 million shares. The share issuance funded debt repayment and increased year-end shares outstanding.
- The company paid $106.6 million in common dividends in 2018. The board declared a 2019 quarterly dividend of $0.505 per share, equivalent to $2.02 annually; management described this as a 5% increase and the 49th consecutive annual increase.
- Credit ratings at year-end were BBB+ from S&P and Fitch and Baa2 from Moody’s, all with stable outlooks. S&P upgraded the company to BBB+ during 2018.
Material changes, outlook and management commentary
- Management expects approximately $2.5 billion of capital investment over 2019–2023, with planned annual expenditures of $670 million in 2019, $524 million in 2020, $482 million in 2021, $443 million in 2022 and $414 million in 2023. Investment is primarily directed to utility infrastructure, system integrity, customer growth and generation.
- The company’s strategy emphasizes infrastructure modernization, operating efficiency, customer experience, renewable generation and safety. Management expects utility capital deployment and efficiency initiatives to support long-term growth, but the filing provides no formal 2019 earnings or EPS guidance.
- Projects include the 60 MW Busch Ranch II wind project, expected in service by the end of 2019; a proposed $57 million, 40 MW Corriedale wind project; and a proposed Wygen I acquisition by Wyoming Electric, requiring regulatory approvals. The $54 million Natural Bridge gas pipeline is planned for service in late 2019.
- Management estimates that delivering TCJA tax benefits to customers will reduce cash flow by approximately $40–$45 million annually for several years. Approximately $37 million of 2018 utility revenue was reserved for customer benefits; about $19 million had been returned by year-end, with roughly $18 million remaining as a current regulatory liability. The company also reported approximately $311 million in regulatory liabilities associated with TCJA-related items, primarily excess deferred taxes.
- Potential environmental exposure includes an estimated approximately $40 million share of possible Wyodak Plant selective catalytic reduction costs if a federal regional-haze requirement is upheld. The final impact of pending water-discharge rules was not quantifiable. The company also reported a $2.6 million accrual for an Iowa manufactured-gas-plant site, with estimated remediation costs ranging from $2.6 million to $6.1 million.
- Other principal risks include regulatory decisions and cost-recovery delays, weather variability, fuel and wholesale energy prices, outages and infrastructure failures, pipeline safety, cyberattacks, environmental regulation, financing access and pension assumptions. A Wyoming power-cost settlement requires $7 million in customer credits over 2018–2020; $6 million was recorded as a liability at year-end.
- Annual cash from operations exceeded continuing-operations property additions, but substantial planned investment, dividends, debt maturities and working-capital needs remain. Management believes available cash, operating cash flow, borrowing capacity and market access are adequate to fund anticipated needs.
Most important facts for investors to verify
- Separate the $73 million restructuring tax benefit and other tax-reform effects from recurring earnings; review the related tax and regulatory disclosures.
- Track whether operating income and Electric Utilities margins recover as operating costs rise, and assess the sustainability of Gas Utilities’ 2018 earnings excluding the tax benefit and weather effects.
- Confirm actual capital spending against the five-year plan, the regulatory recovery of infrastructure investments, and the timing and approval of the wind and pipeline projects and any Wygen I acquisition.
- Monitor debt refinancing needs, commercial-paper reliance, credit ratings, planned ATM equity issuance and the effect of share issuance on per-share results.
- Follow the resolution and potential cost of the Wyodak regional-haze matter, manufactured-gas-plant remediation and other environmental or regulatory contingencies.