Black Hills Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Black Hills provides regulated electric and natural gas service to approximately 1.3 million customers in eight states, alongside related generation and other businesses. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $462.6 million | $380.6 million | $1,760.4 million | $1,386.6 million |
| Operating income | $79.5 million | $89.9 million | $325.2 million | $295.5 million |
| Net income | $37.8 million | $48.2 million | $194.7 million | $176.9 million |
| Net income available to common stock | $35.0 million | $44.1 million | $185.9 million | $165.6 million |
| Diluted EPS | $0.54 | $0.70 | $2.86 | $2.63 |
- Quarterly comparison: Revenue increased about 22%, but operating income fell about 12% and diluted EPS declined about 23%. Higher operating costs, prior-year wholesale energy mark-to-market gains, lower pricing on the new Wygen I PPA, and higher interest expense weighed on results.
- Nine-month comparison: Revenue rose about 27%, operating income about 10%, and diluted EPS about 9%. Gas Utilities operating income increased to $162.3 million from $139.3 million, while Electric Utilities operating income increased to $165.5 million from $159.6 million.
- Utility margins: Management’s non-GAAP Electric Utility margin was $172.7 million for Q3 and $474.6 million for the nine months, versus $169.3 million and $449.8 million, respectively, in 2021. Non-GAAP Gas Utility margin was $125.5 million and $504.6 million, versus $121.5 million and $454.0 million. These measures exclude operating expenses, depreciation and certain taxes and are not GAAP operating income.
- Cash flow: Operating activities provided $494.3 million in the first nine months, versus cash used of $144.8 million a year earlier. The improvement was driven substantially by year-over-year changes in regulatory assets and liabilities, including Winter Storm Uri cost recovery. Investing activities used $466.3 million, including property and equipment additions of $466.3 million. Financing activities used $24.7 million; dividends paid were $115.9 million.
- Debt and liquidity: At September 30, short-term notes payable were $501.4 million and long-term debt, net of current maturities, was $4.131 billion. Cash was $11.7 million, with another $5.4 million restricted. The $750 million revolving credit facility and commercial paper program had $229 million of available capacity after $501 million of borrowings and $20 million of letters of credit. The company reported covenant compliance; its consolidated indebtedness-to-capitalization ratio was 61.7% against a 65% maximum.
- Margins and costs: Energy commodity costs are generally passed through to customers under regulatory mechanisms, but higher bills contributed to increased bad-debt expense. Management also cited inflation in materials, outside services and vehicle costs, supply-chain constraints, labor competition and higher interest rates. About 89% of debt was fixed-rate at quarter-end.
Material changes, outlook and notable items
- Winter Storm Uri: Commissions approved all company recovery applications for $546 million of incremental costs, allowing full recovery. The remaining Uri regulatory asset was $393.0 million at September 30, with an estimated weighted-average recovery period of 2.8 years. Utilities collected $125 million from customers during the first nine months of 2022. Carrying costs included a one-time rate true-up in the second quarter.
- Rates and capital program: Arkansas Gas received approval in October 2022 for new rates expected to generate $8.8 million of annual revenue. Wyoming Electric sought $15 million of new annual revenue; RMNG sought $12.3 million, plus a shift of $7.7 million of rider revenue to base rates. These latter proceedings were pending. Forecast capital expenditures were $627 million for 2022, $600 million for 2023 and $819 million for 2024; forecasts include significant gas utility and RNG investment.
- Financing and dividends: Management plans to refinance $525 million of 4.25% senior unsecured notes due November 30, 2023. The board declared a quarterly dividend of $0.625 per share in October, equivalent to $2.50 annually; future dividends remain subject to board approval and financial and capital needs.
- Projects and energy transition: Wyoming Electric’s Ready Wyoming transmission project received approval in October, with construction expected in phases from 2023 through 2025. The company’s Colorado clean-energy plan remained subject to regulatory review. New wind and solar purchase agreements are planned to support Wyoming customer growth. The company announced a Net Zero by 2035 goal for Gas Utilities and was evaluating opportunities under the Inflation Reduction Act.
- Legal contingency: A jury awarded $41 million to GT Resources in a dispute concerning a Costa Rica concession. Black Hills appealed and said it believes it has meritorious defenses; the company stated any liability was not reasonably estimable at the filing date.
- Risks and seasonality: Results vary seasonally, particularly for gas utilities, so interim performance is not necessarily indicative of full-year results. Key risks include regulatory cost recovery and timing, capital-project execution, supply-chain and inflation pressures, commodity and interest-rate volatility, financing access, and environmental regulation.
- Controls: Management concluded disclosure controls were effective as of September 30, 2022; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Track whether pending rate cases are approved, when new rates take effect, and how much requested revenue is ultimately authorized.
- Monitor recovery and carrying costs for the remaining $393 million Winter Storm Uri regulatory asset, including customer collection timing.
- Assess whether operating-cost inflation, bad debt, supply constraints and higher borrowing costs continue to pressure earnings and cash generation.
- Confirm funding and execution of the elevated capital program, refinancing of the 2023 notes, and available credit capacity.
- Follow the GT Resources appeal and any change in the company’s assessment of potential liability; the filing provides no clear estimate of a probable loss.