Black Hills Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; compared with Q1 2016. Black Hills operates electric and gas utilities, power generation, mining, and oil and gas businesses. Q1 2017 included a full quarter of SourceGas operations, versus a partial quarter in Q1 2016, limiting direct comparability.
Financial performance and position
- Revenue: $554.0 million, up $104.0 million (23%) from $450.0 million. Gas Utilities contributed $364.9 million of external revenue.
- Earnings: Operating income was $147.5 million versus $73.6 million. Net income was $80.1 million; net income available to common shareholders was $76.5 million, or $1.39 diluted EPS, compared with $40.0 million and $0.77 per diluted share. The reported income tax rate was 29.4%, versus 9.6%.
- Operating drivers: Gas Utilities common earnings rose to $46.0 million from $31.9 million, including the full-quarter SourceGas contribution. Electric Utilities earnings increased to $22.2 million from $19.2 million. Power Generation earnings available to common fell to $6.5 million from $8.6 million, including $3.5 million attributable to its noncontrolling owner. Oil and Gas posted a $3.0 million loss, improved from a $7.0 million loss.
- Margins: Electric Utilities gross margin, a company-defined non-GAAP measure, was $107.6 million versus $101.2 million. Gas Utilities gross margin was $183.5 million versus $132.5 million; the increase primarily reflects SourceGas. These segment measures exclude depreciation and should not be treated as consolidated GAAP margins.
- Cash flow and investment: Operating cash flow was $146.8 million, versus $133.1 million. Capital expenditures were approximately $69 million; investing cash outflow was $69.5 million. Dividends paid were $23.8 million, or $0.445 per share. Cash and cash equivalents ended the quarter at $11.4 million.
- Debt and liquidity: At March 31, short-term notes payable were $51.0 million, current maturities of long-term debt were $5.7 million, and long-term debt was $3.211 billion. The $750 million revolver/CP program had $671 million of reported available capacity after $51 million of commercial paper and $28 million of letters of credit; commercial paper's weighted-average rate was 1.27%. The covenant debt-to-capitalization ratio was 61%, within the 65% limit. Current assets of $401.4 million exceeded current liabilities of $391.5 million.
- Capital and equity: Total assets were $6.476 billion and total equity was $1.789 billion. Planned 2017 capital expenditures were $324 million; 2018 and 2019 plans were $305 million and $365 million, respectively.
Material changes versus Q1 2016
- Common earnings increased $36.5 million. Management cited stronger utility earnings, reduced corporate costs, and lower oil-and-gas impairment charges. SourceGas added approximately $12 million to common earnings as the quarter included a full period of operations.
- Corporate results improved by $17.5 million, from a $15.6 million loss to $1.8 million of income, principally because after-tax acquisition and transition costs fell from approximately $15 million to $0.9 million.
- Q1 2016 included a $14.5 million pre-tax oil-and-gas impairment and approximately $11 million of tax benefits from prior-year depletion deductions and an IRS Appeals-related tax adjustment. Q1 2017 had no oil-and-gas impairment and included a $3.2 million net tax benefit, including a carryback claim and an effective-tax-rate adjustment.
- Operating cash flow increased $13.8 million. Investing cash outflow was far lower because Q1 2016 included the SourceGas acquisition; financing cash flow shifted from $668.6 million provided to $79.6 million used, reflecting prior-year acquisition financing and current-year debt repayments and distributions.
- Oil and Gas production volumes declined 21%, reflecting asset sales and production limits under gas-processing commitments. The average hedged natural-gas price received increased 33%, while the hedged oil price declined 4%.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides capital-expenditure plans but no specific earnings or revenue guidance. Management said cash on hand, operating cash flow, borrowing capacity, and access to financing should be sufficient for operating needs, debt maturities, dividends, and planned capital spending. The company expects to renew its shelf registration and ATM program and remarket junior subordinated notes maturing in 2018.
- Projects and regulation: Colorado Electric received approval for a resource plan adding 60 MW of renewable generation by 2019 and planned to seek proposals in Q2 2017. It also sought reconsideration of a rate-case decision that approved a $1.2 million annual revenue increase versus $8.9 million requested. A 144-mile transmission project was expected to have its remaining segment placed in service in the first half of 2017.
- Weather and seasonality: Gas utilities are seasonal, with management expecting over 70% of annual gas utility revenue and margins in Q1 and Q4. Q1 2017 combined heating degree days were 13% below normal for gas utilities and 11% below normal for electric utilities. Results for the quarter are not necessarily indicative of full-year results.
- Risks and contingencies: Key exposures include weather, commodity prices, counterparty credit and collateral requirements, regulatory decisions, capital-market access, and holding-company dependence on subsidiary distributions. Management reported $3.2 million of collateral posted on wholesale commodity contracts and sufficient liquidity for additional collateral needs. Utility restricted net assets were approximately $257 million. The filing reported no material changes to previously disclosed risk factors or significant changes in commitments and contingencies.
- Credit and controls: Fitch affirmed BBB+ and changed its outlook from Negative to Stable, citing SourceGas integration and expected credit-metric improvement; S&P and Moody's outlooks were also Stable. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of earnings growth reflects sustainable utility performance versus SourceGas being included for a full quarter, lower acquisition costs, and tax items?
- Whether utility rate-case outcomes, renewable generation and transmission investments, and planned capital spending deliver expected returns and remain financeable.
- Progress in reducing leverage and maintaining covenant headroom, credit ratings, and access to the $750 million revolver/CP backstop.
- Oil and Gas production, commodity prices, hedging results, non-core asset divestitures, and exposure to minimum-volume gathering and processing commitments.
- Dividend capacity given seasonal cash needs, subsidiary distribution restrictions, and planned capital expenditures.