Black Hills Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The company operates regulated electric and gas utilities, power generation, coal mining, and oil and gas businesses. Results include SourceGas from its February 12, 2016 acquisition; year-over-year comparisons are therefore not fully comparable.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $333.8 million | $272.1 million | $1,109.2 million | $986.3 million |
| Operating income (loss) | $58.4 million | $(2.0) million | $167.3 million | $29.6 million |
| Operating margin | 17.5% | (0.8)% | 15.1% | 3.0% |
| Net income (loss) available to common stock | $14.1 million | $(9.9) million | $54.8 million | $(17.9) million |
| Diluted EPS | $0.26 | $(0.22) | $1.04 | $(0.40) |
- For the first nine months, operating cash flow was $224.7 million, down from $365.9 million. Investing cash outflow was $1.459 billion, including $1.124 billion for SourceGas net of debt assumed and working-capital adjustment, and $334.1 million of property additions. Financing provided $840.9 million. Cash ended at $63.0 million, versus $456.5 million at year-end 2015.
- At September 30, current assets were $418.2 million and current liabilities $480.8 million. Balance-sheet debt, including notes payable and current maturities, was approximately $3.29 billion; long-term debt rose substantially following the acquisition and associated financing.
- The amended revolving credit facility totals $750 million; $75 million was drawn and $31 million of letters of credit outstanding, leaving $644 million available. The company reported a 68% indebtedness-to-capitalization ratio against a 70% limit for the September and December 2016 quarters, and was in compliance.
- Common dividends declared were $0.42 per share for Q3; the board declared another $0.42 quarterly dividend payable December 1, 2016.
Material changes and drivers
- Reported revenue rose 23% in Q3 and 12% year to date, substantially reflecting SourceGas, which contributed $217 million of revenue and $0.8 million of net income from acquisition through September 30. SourceGas serves about 429,000 customers; the expanded company reports approximately 1.02 million gas customers.
- Common earnings improved versus 2015 largely because oil-and-gas impairment charges were lower, and because electric and gas utility earnings increased. Q3 2016 included $12.3 million of pretax oil-and-gas impairment charges, versus $61.9 million a year earlier; nine-month charges were $52.3 million versus $178.4 million.
- Gas Utilities earned $30.0 million for the first nine months, up from $27.5 million, but recorded a $2.9 million common loss in Q3 versus $0.7 million income. Acquisition-related revenue and margins were accompanied by higher operating costs, depreciation and interest expense; gas demand is highly seasonal.
- Electric Utilities’ nine-month common earnings increased to $62.6 million from $57.8 million. Power Generation’s common earnings declined to $19.9 million from $24.8 million, partly reflecting the sale of a 49.9% interest in its Colorado IPP; Mining earnings declined to $7.0 million from $9.1 million.
- Oil and Gas recorded a nine-month common loss of $35.3 million, substantially better than the $130.1 million loss in 2015, mainly due to lower impairments. However, year-to-date hedged realized prices fell 14% for oil and 32% for gas.
Outlook, risks and unusual items
- No consolidated earnings guidance is provided in the filing. Planned capital expenditures are $480.1 million for 2016, $324.0 million for 2017 and $304.7 million for 2018. Management said available cash, operating cash flow, borrowing capacity and access to debt and equity markets are expected to fund operations, debt maturities, dividends and planned capital needs.
- The company withdrew Cost of Service Gas applications in Wyoming, Iowa, Kansas and South Dakota after adverse or insufficient-information regulatory outcomes in Nebraska and Colorado. It is reassessing the strategy and considering applications tied to specific gas reserves. Failure to obtain approvals could lead to further material oil-and-gas impairments.
- SourceGas purchase accounting remains preliminary. The acquisition added approximately $941 million of goodwill, and the final allocation may change, potentially materially. Regulatory approval conditions include rate-case moratoria and customer credits; regulators disallowed goodwill and transaction-cost recovery.
- Low commodity prices prompted current-period oil-and-gas impairments and remain a risk. The filing also identifies seasonal demand, interest-rate and commodity exposure, possible collateral requirements, and integration and internal-control risks. SourceGas was excluded from management’s 2016 internal-control assessment while integration continues.
- The company recorded tax benefits related to additional percentage-depletion deductions and an IRS Appeals agreement on uncertain tax positions. These benefits, along with acquisition costs and noncash impairments, affected reported earnings. Moody’s and Fitch maintained negative outlooks after the acquisition; S&P maintained a stable outlook.
- The company reported a 68% debt-to-capitalization ratio against a 65% covenant limit applicable after the December 2016 quarter. It stated that it was compliant at September 30; failure to meet future covenant limits could trigger default consequences.
Important facts for investors to verify
- How SourceGas integration, operating costs and regulatory conditions affect recurring earnings and cash generation.
- Whether the preliminary purchase-price allocation and $941 million of acquisition goodwill change, and the outcome of subsequent impairment testing.
- Progress on the Cost of Service Gas strategy, regulatory approvals and potential additional oil-and-gas impairments.
- Debt covenant headroom as the limit tightens to 65%, credit-rating outlooks, refinancing needs and available liquidity.
- Execution and cost recovery for planned utility projects, including the Colorado combustion turbine and Peak View Wind Project.
- The sustainability of earnings after separating recurring operations from tax benefits, impairments, acquisition and transition costs, and noncontrolling-interest allocations.