Black Hills Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Black Hills is a U.S. utility company with electric and gas utility, power generation, and coal mining segments. Results are seasonal, particularly for gas utilities.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $346.6 million | $325.5 million | $1,210.6 million | $1,257.2 million |
| Operating income | $82.2 million | $70.6 million | $302.4 million | $284.7 million |
| Net income available to common shareholders | $36.3 million | $11.7 million | $150.4 million | $130.1 million |
| Diluted EPS | $0.58 | $0.19 | $2.41 | $2.15 |
- Q3 revenue grew about 6.5% and operating income about 16.6% year over year. Approximate operating margin was 23.7%, versus 21.7% in Q3 2019.
- Nine-month revenue declined about 3.7%, while operating income rose about 6.2% and diluted EPS about 12.1% year over year.
- Cash from operations for the first nine months was $419.5 million, versus $386.1 million. Capital expenditures were $536.0 million; investing cash outflow was $529.7 million. Financing activities provided $107.8 million.
- At September 30, cash was $7.0 million and reported liquidity was $648 million, including $641 million of available revolving-credit capacity. Current assets were $403.7 million and current liabilities $513.9 million.
- Debt included $84.3 million of commercial paper, $9.9 million of current maturities and $3,526.9 million of long-term debt, net. The debt-to-capitalization covenant ratio was 59.3%, below the 65% limit.
- Common dividends paid totaled $100.0 million for nine months, or $0.535 per share per quarter. The board declared a quarterly dividend of $0.565 per share payable December 1, 2020.
Material changes and drivers
- Q3 Gas Utilities adjusted operating income increased $13.4 million, chiefly from favorable weather, new Wyoming and Nebraska rates, and commodity-contract mark-to-market gains. Electric Utilities increased $1.4 million; Power Generation declined $3.1 million, including an asset-retirement expense.
- For nine months, Gas Utilities adjusted operating income rose $22.6 million, while Electric Utilities declined $3.5 million and Power Generation declined $2.5 million. Milder first-quarter winter weather reduced gas volumes and contributed to lower year-to-date revenue.
- Q3 and nine-month net income comparisons benefited from the absence of the prior-year $19.7 million investment impairment. Black Hills recorded a further $6.9 million impairment in Q1 2020; the investment’s remaining carrying value was $1.5 million.
- Resolution of remaining tax-related regulatory dockets increased net income by $3.5 million in Q3 and $4.0 million year to date. Q3 effective tax rate was 10.3%, versus 14.0%; the nine-month rate was 13.6% in both years.
- COVID-19 effects included lower gross margin, waived late fees, additional bad-debt expense, and costs for essential-employee sequestration, partly offset by lower travel and other costs. Management reported limited overall financial and operational impact through September.
Outlook, risks and unusual items
- No consolidated earnings guidance is stated in the provided filing text. Planned capital expenditures were $733 million for 2020 and $633 million for 2021; the company said COVID-19 had not materially disrupted projects and did not then expect a significant 2020 capital-plan impact.
- Management cited $648 million of available liquidity and no material debt maturities until late 2023. In June, the company issued $400 million of 2.50% senior notes due 2030; in February, it issued shares for $99 million net proceeds. A renewed at-the-market equity program has a $400 million aggregate capacity; no shares were sold under it through September 30.
- COVID-19 risks include customer payment difficulties and higher credit losses, demand and load changes, supply or staffing disruption, delayed projects or rate proceedings, counterparty deterioration, impairment, and reduced access to capital. Customer disconnection restrictions had been temporarily suspended in all jurisdictions; the company increased its allowance for credit losses by $3.7 million year to date.
- Regulatory matters include Colorado Gas’s request for $13.5 million of new annual revenue and Nebraska Gas’s request for $17.3 million; both were pending, with Nebraska interim rates effective September 1. Colorado Gas’s earlier rate order denied requested territory consolidation and a recovery mechanism and reduced annual revenue by $0.6 million.
- Renewable projects and long-term contracts include a planned 200 MW Colorado solar project, an 80 MW solar PPA expected to begin after facility completion in 2022, and a 60 MW Wygen I PPA settlement for an 11-year term beginning in 2022.
- Management reported compliance with debt covenants and effective disclosure controls. The filing states no material changes to previously disclosed risk factors other than the COVID-19 discussion.
Important facts for investors to verify
- Whether customer arrears, disconnection policies and bad-debt expense increase as pandemic-related restrictions and economic conditions evolve.
- Regulatory outcomes, timing and allowed returns for the Colorado and Nebraska rate cases, and recovery of COVID-related costs.
- Execution, cost and timing of planned capital projects and renewable PPAs, including the 2020–2021 capital program.
- Debt, refinancing and liquidity trends, covenant headroom, and any use of the expanded at-the-market equity program.
- How much reported earnings growth reflects recurring utility operations versus prior-year impairment comparisons, regulatory tax items and commodity mark-to-market gains.