Black Hills Corporation — Q3 2018 Form 10-Q
Business context and period. This quarterly report covers the three and nine months ended September 30, 2018, and was filed November 6, 2018. Black Hills operates regulated electric and gas utilities, power generation, and coal mining businesses in the United States. Its oil and gas segment was being divested and is reported as discontinued operations.
Financial performance and position
- Third-quarter revenue: $322.0 million, down 4.1% from $335.6 million. Operating income was $65.1 million versus $79.6 million; net income available to common stock was $17.0 million versus $27.7 million. Diluted EPS was $0.31 versus $0.50, including a $0.02 per-share loss from discontinued operations in both periods.
- Nine-month results: Revenue was $1.253 billion, up 2.3% from $1.225 billion. Net income available to common stock rose to $171.9 million from $126.4 million, and diluted EPS to $3.15 from $2.29. Results included a $49 million deferred tax benefit from legal-entity restructuring; the increase in reported earnings therefore does not solely reflect operating growth.
- Margins: Operating margin was approximately 20.2% for Q3 versus 23.7% a year earlier, and 22.6% for the nine-month period versus 24.5%. The company’s segment gross-margin measure is non-GAAP.
- Cash flow and investment: Nine-month operating cash flow was $378.7 million, compared with $319.4 million. Capital additions were $278.1 million versus $238.8 million; net cash used in investing was $281.8 million. Dividends paid were $76.3 million.
- Debt and liquidity: At September 30, cash and cash equivalents were $10.0 million, restricted cash $3.2 million, commercial paper borrowings $112.1 million, and long-term debt including current maturities approximately $3.207 billion. The $750 million revolving facility had $623 million available after commercial paper and letters of credit. The debt-to-capitalization covenant ratio was 61.4%, below the 65% limit; the company reported covenant compliance.
- Dividend: The declared quarterly dividend was $0.475 per share during the first nine months. On October 30, the board declared $0.505 per share, payable December 1, 2018.
Material changes versus the prior comparable period
- Q3 earnings declined as electric and gas utility results weakened. Management cited unfavorable weather, a Wyoming electric settlement, higher operating and employee costs, and tax-reform estimate adjustments. Q3 electric and gas utility earnings fell by $5.7 million and $8.9 million, respectively.
- Nine-month earnings increased substantially, primarily because of the $49 million gas-utility tax benefit associated with legal restructuring, as well as colder winter weather and higher gas sales. Excluding that tax benefit, the reported year-over-year earnings increase would be materially smaller.
- Gas Utilities’ nine-month gross margin rose $7.5 million, while Electric Utilities’ fell $1.0 million. Both segments recorded revenue reserves to pass tax-reform benefits to customers.
- On August 17, the company issued $400 million of 4.350% senior unsecured notes due 2033. Part of the transaction retired $299 million of remarketable notes; remaining proceeds reduced short-term debt. The revolver was extended to July 2023, and a $300 million term loan was extended to July 2020.
- After quarter-end, Equity Unit purchase contracts settled for approximately $299 million in gross proceeds in exchange for about 6.372 million shares. The company said proceeds would be used to repay $250 million of notes due January 2019 and reduce short-term debt.
Outlook, commentary, risks and unusual items
- Management stated that cash on hand, operating cash flow, borrowing capacity, and access to debt and equity markets were expected to fund operations, debt maturities, dividends, and planned capital spending. The filing provides no specific earnings or EPS guidance.
- Planned capital expenditures were $488 million for 2018, $651 million for 2019, and $475 million for 2020. Management noted that estimates may vary with growth opportunities; gas-utility plans increased mainly because of integrity spending.
- The company estimated that the lower federal tax rate would reduce cash flows by approximately $40–$45 million annually for the next several years, while tax-related customer benefits increase working-capital needs. Approximately $21 million of the recorded tax-reform revenue reserve remained at September 30.
- Key exposures include seasonal demand and weather, natural-gas and other commodity prices, variable-rate borrowing costs, counterparty credit and collateral requirements, regulatory decisions, and access to capital. Utility cash distributions to the parent are subject to regulatory and financing restrictions.
- The oil and gas divestiture was nearly complete at quarter-end; final asset closings and accounting were expected in Q4 2018. Nine-month discontinued operations recorded a $5.6 million loss. A $13 million after-tax write-down of held-for-sale assets had been recorded in 2017; no additional held-for-sale valuation adjustment was recorded in this quarter.
- The company expected to adopt the new lease standard on January 1, 2019 and did not anticipate a material financial impact. Management reported effective disclosure controls and no material changes in internal control during the quarter; the filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of the nine-month earnings increase reflects the one-time $49 million tax benefit, and what are underlying segment trends?
- Whether customer tax benefits, rate cases, and regulatory settlements affect future margins and cash flows as expected.
- Execution and funding of the 2018–2020 capital program, especially increased gas-utility integrity investment.
- Completion and final accounting of the oil and gas divestiture, and use of Equity Unit proceeds to address near-term debt.
- Seasonality, weather, commodity prices, interest rates, and regulatory limits on subsidiary distributions, including their implications for liquidity and dividends.