Business Context and Reporting Period
Black Hills Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company operates regulated electric and gas utilities, power generation and coal mining businesses in the United States. Results are seasonal, particularly for gas utilities, whose peak usage period is generally November through March.
Financial Performance and Position
- Third quarter: Revenue was $325.5 million, up 1.1% from $322.0 million. Operating income rose to $70.6 million from $65.1 million; operating margin was approximately 21.7%, versus 20.2%. Net income available to common shareholders fell to $11.7 million from $17.0 million, and diluted EPS was $0.19 versus $0.31.
- Nine months: Revenue was $1.257 billion, up 0.3%. Operating income was $284.7 million versus $282.9 million; operating margin was approximately 22.6% in both periods. Net income available to common shareholders declined to $130.1 million from $171.9 million, and diluted EPS was $2.15 versus $3.15.
- Cash flow: Nine-month operating cash flow was $386.1 million, compared with $378.7 million. Property, plant and equipment additions were $592.5 million, resulting in cash used in investing activities of $593.3 million. Cash, cash equivalents and restricted cash ended the period at $16.8 million.
- Debt and liquidity: At September 30, notes payable were $294.9 million and long-term debt, including current maturities, was approximately $3.055 billion. The $750 million revolving credit facility and commercial paper program had $437 million of available capacity after $295 million of borrowings and $18 million of letters of credit. The company reported compliance with its debt covenants.
- Capital and shareholder returns: The company issued shares through its ATM program for $99 million net proceeds during the first nine months. It paid $0.505 per share per quarter during the period; after quarter-end, the board declared a quarterly dividend of $0.535 per share.
Material Changes Versus Prior Period
- Quarterly common earnings declined despite higher operating income, principally reflecting a $19.7 million non-cash impairment of an investment in a privately held oil and gas company. The impairment followed weaker investee performance and lower expected natural gas prices.
- Nine-month common earnings were also affected by the absence of a prior-year $49 million tax benefit from legal-entity restructuring. In 2019, new wind-related production and investment tax credits helped reduce the effective tax rate.
- Electric Utilities’ adjusted operating income increased $7.3 million in the quarter, supported by weather, industrial demand and rider revenues. Mining’s adjusted operating income fell $1.2 million in the quarter and $3.3 million year to date, largely due to fewer coal tons sold amid generating-plant outages.
- Capital spending increased substantially: investing cash outflow was $593.3 million versus $281.8 million in the prior-year period, reflecting utility safety and reliability programs, the Natural Bridge pipeline, wind development and transmission construction.
Outlook, Commentary and Risks
- The filing provides no specific earnings or EPS guidance. Planned capital expenditures are $820 million for 2019, including actual spending through September, and $623 million for 2020; management notes spending may vary with investment opportunities.
- On October 3, 2019, the company issued $700 million of senior notes: $400 million at 3.05% due 2029 and $300 million at 3.875% due 2049. Proceeds repaid a $400 million term loan, retired $200 million of 5.875% notes due 2020 and reduced short-term debt.
- Management estimates that returning Tax Cuts and Jobs Act benefits to customers will reduce cash flow by approximately $40 million to $45 million annually for each of the next several years.
- Regulatory matters include a Wyoming gas rate review seeking $16 million of new annual revenue, with a settlement awaiting commission approval; a Colorado gas rate review seeking $2.5 million; and a pending FERC request for a 60 MW power purchase agreement. The $57 million Corriedale wind project is expected to enter service by the end of 2020.
- Key operating exposures include seasonal weather and demand, planned and unplanned plant outages, commodity and counterparty risks, and potential collateral requirements following a significant credit downgrade. The filing says liquidity was sufficient for collateral that could be required at September 30.
Important Facts for Investors to Verify
- Whether utility rate settlements and requested safety-investment recovery mechanisms are approved, and on what terms.
- Whether capital spending, project schedules and regulatory approvals remain consistent with the company’s plans.
- How the $19.7 million investment impairment and the prior-year tax benefit affect comparisons of ongoing earnings.
- Debt and available liquidity following the October 2019 refinancing, including short-term borrowing needs and covenant headroom.
- Whether weather, outages, customer demand and the planned return of tax benefits to customers affect future cash flow and earnings.