Black Hills Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Black Hills operates regulated electric and gas utilities and power generation, mining, and oil and gas businesses. The SourceGas acquisition closed February 12, 2016, so the first half of 2017 includes six months of its results versus approximately 4.5 months in the 2016 comparison. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless otherwise stated.
Financial performance and condition
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $348.0 million | $325.4 million | $902.0 million | $775.4 million |
| Operating income | $68.9 million | $35.3 million | $216.4 million | $108.9 million |
| Net income available to common stock | $22.2 million | $0.7 million | $98.7 million | $40.7 million |
| Diluted EPS | $0.40 | $0.01 | $1.79 | $0.78 |
| Operating margin, calculated as operating income/revenue | 19.8% | 10.8% | 24.0% | 14.0% |
- For the six months, operating cash flow was $262.9 million, versus $183.5 million; capital expenditures were $163.8 million, versus $199.9 million. Operating cash flow less capital expenditures was approximately $99.1 million.
- At June 30, cash and cash equivalents were $11.6 million; restricted cash was $2.5 million. Current assets were $359.3 million and current liabilities $438.9 million.
- Debt comprised $108.0 million of notes payable, $5.7 million of current maturities, and $3,160.3 million of long-term debt—approximately $3.27 billion in total. The company reported a 61% consolidated indebtedness-to-capitalization ratio against a 65% maximum covenant and was in compliance.
- The $750 million revolving credit facility and commercial paper program were available in aggregate. At June 30, commercial paper borrowings were $108 million, letters of credit were $25 million, and reported available capacity was $617 million. Commercial paper’s weighted-average rate was 1.41%.
- Dividends declared were $0.445 per share for the quarter. The board declared the same quarterly dividend for payment September 1, 2017.
Material changes and operating drivers
- Q2 common earnings increased to $22.2 million from $0.7 million, primarily because 2016 included approximately $16 million of after-tax oil and gas impairments, higher SourceGas acquisition and transition costs, and weaker mining results. Lower Q2 Gas Utilities earnings partly offset the improvement.
- First-half common earnings increased to $98.7 million from $40.7 million. Drivers included a full six months of SourceGas operations, higher Electric Utilities and Mining earnings, reduced acquisition-related corporate costs, and absence of the prior-year oil and gas impairment. Comparisons also reflect tax benefits in 2016 that did not recur in full.
- Gas Utilities first-half earnings rose to $45.7 million from $32.9 million, including approximately $13 million of incremental earnings associated with the longer SourceGas comparison period. Q2 Gas Utilities recorded a $0.3 million loss versus $1.0 million of income a year earlier.
- Oil and Gas remained loss-making: first-half loss was $4.9 million versus $26.4 million. Production fell 22% for the first half following non-core asset sales and production limits tied to processing commitments. There were no first-half 2017 impairments, compared with $40 million pre-tax in the 2016 period.
- Mining first-half earnings rose to $5.6 million from $3.7 million, mainly on higher coal volumes following an extended prior-year outage. Power Generation common earnings declined to $11.9 million from $14.3 million, principally reflecting lower earnings attributable to common shareholders after the sale of a 49.9% interest in Colorado IPP.
Outlook, management commentary, and risks
- Management said cash on hand, operating cash flow, borrowing capacity, and access to debt and equity financing should provide sufficient resources for operations, debt maturities, dividends, and anticipated capital spending. No full-year earnings or EPS guidance is stated in the provided filing text.
- Planned capital expenditures were $350 million for 2017, $364 million for 2018, and $478 million for 2019. Higher 2018–2019 plans reflect electric transmission and distribution work and gas utility growth and integrity investment.
- South Dakota Electric’s approved settlement establishes a six-year rate moratorium beginning July 1, 2017, absent extraordinary events, suspends specified adjustment mechanisms, and increases the annual power-marketing margin guarantee by $1 million. Accelerated amortization of regulatory assets is expected to add approximately $2.7 million of annual amortization expense.
- Colorado Electric appealed the regulator’s decision approving a $1.2 million annual revenue increase rather than the requested $8.9 million; the rehearing request was denied and an appeal was filed in district court in July 2017. The filing provides no resolution.
- Natural gas and electricity demand is seasonal; management cautions that interim results are not necessarily indicative of full-year results. Commodity prices, weather, capital needs, regulation, and market access can affect cash flows. Commodity contracts may require collateral; $2.5 million was posted at June 30, and the company reported sufficient liquidity for additional requirements.
- Oil and gas exposure includes commodity-price risk and a Piceance gathering and processing agreement requiring payment on a minimum 20,000 Mcf per day regardless of volumes delivered. The company is divesting non-core oil and gas assets and is assessing a possible cost-of-service gas program.
- Ratings were BBB (S&P), Baa2 (Moody’s), and BBB+ (Fitch), all with stable outlooks as reported. Management expected to renew its shelf registration and ATM program; an August 2017 filing was planned to reset the ATM program to up to $300 million. These are plans, not completed actions in this report.
- The company reported no material changes to previously disclosed risk factors, no significant changes to commitments and contingencies other than those described in the filing, and effective disclosure controls as of June 30, 2017.
Important facts for investors to verify
- Whether the South Dakota settlement’s rate and amortization terms, including the expected $2.7 million annual expense increase, affect future earnings as described.
- Progress and outcome of Colorado Electric’s appeal, and the timing and economics of the planned renewable generation additions and capital program.
- Whether SourceGas integration benefits continue and whether reported growth remains comparable as acquisition-related costs decline.
- Oil and gas production trends, asset-sale proceeds, commodity-price hedges, and exposure to minimum-volume gathering and processing obligations.
- Debt levels, refinancing and remarketing plans, covenant headroom, borrowing capacity, and the planned ATM renewal and potential dilution.
- Seasonal working-capital needs, regulatory recovery of costs, and potential collateral calls under commodity contracts.