Black Hills Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Black Hills is a U.S. regulated electric and gas utility with power generation and coal mining businesses. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
- Q2 revenue: $326.9 million, down 2.1% from $333.9 million a year earlier. Operating income increased to $66.9 million from $54.0 million; net income available to common stock rose to $21.0 million from $14.6 million. Diluted EPS was $0.33 versus $0.24.
- First-half revenue: $864.0 million, down 7.3% from $931.7 million. Operating income was $220.1 million, up from $214.1 million; net income available to common stock was $114.1 million, down from $118.4 million. Diluted EPS was $1.83 versus $1.96.
- Margins: Consolidated operating margin was approximately 20.5% in Q2 and 25.5% in the first half, compared with 16.2% and 23.0%, respectively, in 2019. Management’s non-GAAP segment gross margin increased in Gas Utilities, while Electric Utilities gross margin was essentially flat.
- Cash flow: First-half operating cash flow was $309.0 million versus $289.8 million. Capital expenditures were $348.3 million versus $317.7 million, resulting in $349.7 million of net cash used in investing activities. Dividends paid were $66.4 million.
- Debt and liquidity: Long-term debt, including current maturities, was $3.537 billion at June 30, compared with $3.146 billion at year-end; no notes payable were outstanding. The company issued $400 million of 2.50% senior notes due 2030, using proceeds partly to repay short-term debt. Management reported $770 million of liquidity, including $32 million cash and $738 million available under its $750 million revolving facility. The debt-to-capitalization covenant ratio was 58.7%, below the 65% maximum.
- Other balance-sheet measures: Total assets were $7.690 billion and equity was $2.614 billion. The allowance for credit losses rose to $7.6 million from $2.4 million at year-end.
Material changes versus prior periods
- Q2 earnings improved despite lower revenue, supported by a $9.7 million increase in Gas Utilities adjusted operating income and gains in Power Generation and Mining. Gas Utilities benefited from new Wyoming rates, weather, commodity-contract mark-to-market gains and lower operating costs.
- First-half Gas Utilities adjusted operating income increased $9.2 million, but Electric Utilities adjusted operating income fell $4.9 million. Gas revenue was lower, principally reflecting warmer winter weather and lower volumes; electric results also faced lower commercial volumes and power-marketing margins.
- Interest expense increased $2.0 million in the first half, primarily due to higher debt balances, partly offset by lower rates. A $6.9 million non-cash impairment of an oil-and-gas investment reduced first-half results; its remaining carrying value was $1.5 million.
- Shares issued in a February underwritten offering generated $99 million net proceeds. The quarterly dividend was $0.535 per share; the board declared the same amount for payment in September.
Outlook, commentary and risks
- Management said COVID-19 had limited financial and operational impact through June 30 and did not materially adversely affect reported results. Lower commercial, industrial and transport volumes, employee sequestration costs and higher expected credit losses were partly offset by higher residential use and lower travel, training and outside-services costs. COVID-related bad-debt expense was $2.0 million for the first half.
- Management said it continued to expect no significant COVID-19 impact on its 2020 capital investment plan, with projects proceeding without material schedule disruption. Planned 2020 capital expenditures were $669 million, including $348 million spent in the first half. No specific earnings or EPS guidance is provided in the supplied filing text.
- COVID-19 risks include further demand declines, customer nonpayment and credit losses, supply or project delays, reduced access to capital, potential impairment, and pressure on liquidity, ratings or covenant compliance. Temporary disconnection suspensions increased customer arrears; the company was pursuing payment plans and regulatory recovery for eligible costs.
- Regulatory proceedings remain relevant: Nebraska Gas requested $17 million in new annual revenue and an expanded safety rider, with new rates expected in early 2021. Colorado Gas’s approved rate order denied its proposed integrity mechanism and territory consolidation and reduced annual revenue by $0.6 million; new rates took effect July 3, 2020.
- The company cited seasonality: electric demand typically peaks in summer and gas demand in winter, so interim results may not indicate full-year performance. It also faces commodity, interest-rate, counterparty, pension-estimate and regulatory risks. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-related customer arrears, disconnection policies and the credit-loss allowance worsen or stabilize.
- Execution and funding of the $669 million 2020 capital plan, including the Corriedale wind project, and the effect on leverage and cash flow.
- Regulatory outcomes, especially Nebraska’s requested rate increase and Colorado Gas’s planned follow-up filings.
- Debt refinancing, access to capital, covenant headroom and maintenance of the reported $770 million liquidity position.
- Underlying earnings trends by segment, including weather-sensitive gas results, electric commercial demand and the non-cash investment impairment.