BLACK HILLS CORP quarterly report, Q2 FY2023

Business context and reporting period

Black Hills Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2023. It operates regulated electric and gas utilities across eight states, alongside related non-regulated activities, serving more than 1.3 million customers. Results are seasonal; the company cautions that interim performance is not necessarily indicative of full-year results.

Financial performance

Q2 revenue declined 13% year over year, largely reflecting lower Gas Utilities revenue and associated natural gas costs; six-month revenue increased 3%. Q2 operating income fell 12%, and common EPS fell from $0.52 to $0.35. Six-month operating income decreased 3% and common EPS decreased from $2.33 to $2.06.

The company’s non-GAAP Electric Utility margin was $156.7 million in Q2, up $8.9 million, and $320.0 million for the first half, up $18.1 million. Non-GAAP Gas Utility margin was $137.8 million in Q2, down $4.7 million, and $373.7 million for the first half, down $5.4 million. These margin measures exclude operating and other expenses and are not substitutes for GAAP operating income.

Liquidity, debt and capital

• Cash and cash equivalents were $152.6 million at June 30, 2023, versus $21.4 million at year-end 2022. The company had no Revolving Credit Facility or commercial paper borrowings outstanding and reported $747.2 million of available capacity under its $750 million facility.
• Long-term debt, including current maturities, had a carrying amount of $4.48 billion. Current maturities were $525 million, including 4.25% senior unsecured notes due November 30, 2023; management plans to refinance a portion at or before maturity. The company issued $350 million of 5.95% senior unsecured notes due March 2028.
• The company was in compliance with debt covenants. Its consolidated indebtedness-to-capitalization ratio was 0.59, below the 0.65 limit. Credit ratings were BBB+ (S&P and Fitch) and Baa2 (Moody’s), all with stable outlooks.
• First-half operating cash flow increased by $163.0 million year over year, primarily from working-capital and regulatory-recovery movements. Dividends paid were $83.1 million. The board declared a $0.625-per-share quarterly dividend payable September 1, 2023.
• Common-stock ATM issuances generated $54.9 million net proceeds during the first half. Forecast 2023 capital expenditures are $615 million; planned capital spending is $819 million in 2024 and $700 million annually in 2025–2027.

Material changes and management commentary

• Electric Utilities operating income rose $1.4 million in Q2 and $11.7 million for the first half, benefiting from new rates, rider recovery, transmission services and off-system sales. First-half results also included a $7.7 million gain on the planned sale of Northern Iowa Windpower assets, sold in March.
• Gas Utilities operating income declined $10.5 million in Q2 and $19.4 million for the first half. Drivers included higher operating and employee costs, weather, commodity mark-to-market effects, and the absence of a prior-year $10.3 million Winter Storm Uri carrying-cost true-up; new rates and customer growth partly offset these impacts.
• Interest expense increased $2.8 million in Q2 and $7.7 million for the first half, primarily due to higher interest rates. Q2 included a $6.1 million income tax benefit, principally reflecting an $8.2 million benefit from a Nebraska tax-rate decrease. The first-half effective tax rate was 5.6%, versus 8.1% a year earlier.
• Cash flow benefited from higher collections on pass-through revenues, lower gas storage inventories and increased recoveries of deferred fuel, gas and Winter Storm Uri costs. These working-capital and regulatory timing effects may not recur at the same level.

Outlook, risks and contingencies

• The filing does not provide a clear full-year earnings or EPS guidance figure. Management expects to fund investment and strategic plans through operating cash flow and financing alternatives, potentially including debt, commercial paper and additional ATM share issuance.
• Colorado Electric’s Clean Energy Plan targets an 80% reduction in carbon emissions from 2005 levels by 2030. A July 2023 request for proposals seeks 400 MW of resources for service between 2026 and 2029; the plan’s preferred portfolio includes wind, solar and battery storage, with final resources subject to competitive selection.
• Rate proceedings remain important to recovery of infrastructure and operating costs. Colorado Gas and Wyoming Gas requested annual revenue increases of $27 million and $19 million, respectively, targeting rate decisions in the first quarter of 2024. A separate RMNG settlement approved in July is expected to add $8.2 million of annual revenue; Wyoming Electric’s settlement is expected to add $8.7 million annually.
• Regulatory assets included $233.3 million related to Winter Storm Uri at June 30, 2023. Cost recovery timing and regulatory decisions remain relevant uncertainties.
• Key disclosed risks include regulatory cost recovery, execution and cost of capital programs, financing access and interest rates, inflation and volatile energy prices, supply-chain constraints, emissions goals, and weather. The company reported no material change to previously disclosed risk factors or market-risk disclosures. It reported effective disclosure controls and no material change in internal control over financial reporting.

Investor verification priorities

1. Track refinancing of the $525 million of notes due November 2023, financing costs and the effect of higher interest rates on earnings and liquidity.
2. Assess whether operating cash flow remains strong after the favorable working-capital and regulatory-recovery timing effects in the first half.
3. Monitor the pending Colorado Gas and Wyoming Gas rate cases and recovery of Winter Storm Uri and other regulatory balances.
4. Reconcile segment earnings trends, particularly Gas Utilities’ higher operating costs, and distinguish recurring results from the Northern Iowa Windpower gain and tax benefits.
5. Monitor planned capital spending, Clean Energy Plan resource selection, and any further ATM issuance and resulting shareholder dilution.