Black Hills Corporation — Q3 2023 Form 10-Q
Business context and period: Black Hills is a regulated electric and natural gas utility serving more than 1.3 million customers across eight states, with Electric Utilities and Gas Utilities as its reportable segments. This unaudited quarterly report covers the three and nine months ended September 30, 2023. Results are seasonal and interim results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $407.1 million | $462.6 million | $1,739.6 million | $1,760.4 million |
| Operating income | $97.8 million | $79.5 million | $336.2 million | $325.2 million |
| Net income available to common stock | $45.4 million | $35.0 million | $182.5 million | $185.9 million |
| Diluted EPS | $0.67 | $0.54 | $2.74 | $2.86 |
| Cash from operating activities | Not separately reported | Not separately reported | $756.1 million | $494.3 million |
| Capital expenditures | Not separately reported | Not separately reported | $421.8 million | $466.3 million |
- Q3 revenue declined 12.0% year over year, while operating income rose 23.0% and common earnings increased 29.8%. Lower fuel and natural gas costs reduced reported revenue and related expenses.
- For the first nine months, revenue declined 1.2%, operating income increased 3.4%, and common earnings decreased 1.8%. Diluted EPS fell from $2.86 to $2.74, alongside higher weighted-average shares.
- Utility margin, a non-GAAP measure: Q3 Electric Utility margin was $181.9 million, up $9.2 million; Gas Utility margin was $127.4 million, up $1.8 million. Nine-month Electric Utility margin rose to $501.9 million from $474.6 million, while Gas Utility margin decreased to $501.1 million from $504.6 million.
- Nine-month operating cash flow increased by $261.8 million, primarily reflecting working-capital and regulatory-account changes, including collections of pass-through costs and Winter Storm Uri recoveries. Cash flow less capital expenditures was approximately $334.3 million.
- At September 30, cash and cash equivalents were $594.3 million. Long-term debt, including current maturities, was $4.925 billion; current maturities were $1.125 billion. The company had no Revolving Credit Facility or commercial paper borrowings outstanding and reported $746.3 million of available facility capacity.
- The company reported a 0.61:1.00 consolidated indebtedness-to-capitalization ratio against a 0.65:1.00 maximum covenant limit and said it was in compliance with applicable covenants.
Material changes and significant drivers
- Q3 Electric Utilities operating income increased $13.5 million, aided by new rates and rider recovery, a $5.0 million business-interruption insurance recovery related to the 2021 Wygen I outage, and a $3.9 million land-sale gain. Unfavorable weather partly offset these benefits.
- Q3 Gas Utilities operating income increased $4.8 million, primarily due to new rates and rider recovery and lower operating expenses.
- Nine-month Electric Utilities operating income increased $25.2 million, supported by rates and riders, transmission and excess-energy sales, and one-time gains. The company recorded a $7.7 million gain on the sale of Northern Iowa Windpower assets.
- Nine-month Gas Utilities operating income decreased $14.6 million. Drivers included higher employee costs, unfavorable wholesale commodity-contract mark-to-market adjustments, weather, and the absence of a prior-year $10.3 million Winter Storm Uri carrying-cost true-up; new rates and customer growth partially offset the decline.
- Nine-month net interest expense increased $8.7 million, primarily because of higher interest rates, partly offset by greater interest income on cash balances. Q3 effective tax rate was 13.1%, compared with 5.2%, largely reflecting lower state tax benefits; the nine-month effective rate was 7.6% in both years.
Outlook, financing, risks and contingencies
- Management forecast 2023 capital expenditures of $615 million, followed by $819 million in 2024 and approximately $700 million annually in 2025–2027. Forecasts include projects still being evaluated. Nine-month capital expenditures were $421.8 million.
- The company issued $350 million of 5.95% senior notes due 2028 and $450 million of 6.15% senior notes due 2034 during 2023. It planned to use the latter proceeds and cash on hand to repay $525 million of 4.25% notes due November 30, 2023, and planned to refinance $600 million of 1.04% notes due August 2024.
- The board declared a quarterly dividend of $0.625 per share, payable December 1, 2023, equivalent to $2.50 annually. Future dividends remain subject to board approval and financial, capital and covenant considerations.
- Colorado Electric is evaluating bids from a 400 MW resource solicitation for projects expected in service from 2026 to 2029, supporting its voluntary goal to reduce carbon emissions 80% from 2005 levels by 2030. Final resource selection remains subject to the solicitation and regulatory process.
- Rate proceedings include a Colorado Gas request for $27 million in annual revenue, with rates sought for early 2024, and a Wyoming Gas settlement seeking $13.9 million in annual revenue, subject to regulator approval, with proposed rates effective January 1, 2024. RMNG’s approved settlement is expected to add $8.2 million in annual revenue; Wyoming Electric’s approved settlement is expected to add $8.7 million.
- The company identified regulatory cost recovery and timing, capital-project execution and cost, financing, interest rates, inflation, volatile energy prices, supply-chain constraints, regulation, and emissions goals among forward-looking risks. It reported $225.1 million of Winter Storm Uri regulatory assets at September 30, 2023.
- In the GT Resources litigation, an appellate court reversed the $41 million jury verdict and remanded the case, limiting any retrial to a narrow issue. The company said it believes the suit lacks merit and does not expect losses to materially affect its financial position, results or cash flows.
- Management reported effective disclosure controls as of September 30, 2023, and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the planned November 2023 repayment and 2024 refinancing were completed, and the resulting interest costs and maturity profile.
- Regulatory outcomes, timing and realized revenue from the Colorado Gas and Wyoming Gas proceedings, and recovery of Winter Storm Uri costs.
- Whether operating cash flow remains strong after working-capital and regulatory-recovery timing effects normalize.
- Progress and final economics of the Colorado Electric resource solicitation and the company’s capital expenditure program.
- Whether one-time insurance and asset-sale benefits materially affect comparisons with recurring earnings, and how higher financing costs affect future earnings.