Black Hills Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Black Hills operates electric and gas utilities, power generation and a coal-mining business. Results are seasonal; the company cautions that interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $333.9 million | $355.7 million | $931.7 million | $931.1 million |
| Operating income | $54.0 million | $69.6 million | $214.1 million | $217.8 million |
| Income from continuing operations | $17.7 million | $27.2 million | $125.1 million | $166.1 million |
| Net income available to common shareholders | $14.6 million | $21.9 million | $118.4 million | $154.9 million |
| Diluted EPS | $0.24 | $0.40 | $1.96 | $2.85 |
Q2 revenue declined 6.1% and common net income fell 33%. For the first half, revenue was essentially flat, while common net income fell 23.6%. The comparison includes a $49 million prior-year tax benefit from legal-entity restructuring; 2019’s first-half effective tax rate was 13.5%, versus 19.0% in 2018 excluding that restructuring benefit and related tax-reform adjustment.
Segments and margins
- Electric Utilities: Adjusted operating income was $33.5 million in Q2, down $7.7 million, mainly because of cooler spring weather and higher employee and outside-services costs. First-half adjusted operating income fell $5.1 million.
- Gas Utilities: Q2 adjusted operating income was $8.6 million, down $7.9 million, with flooding and rainfall impacts and higher operating costs. First-half adjusted operating income was nearly unchanged at $111.9 million; higher rates and favorable winter weather helped offset expense increases.
- Power Generation: Q2 adjusted operating income increased $1.3 million to $10.2 million; first-half income rose $1.5 million to $22.1 million, supported by higher wind generation and PPA prices, partly offset by depreciation on new wind assets.
- Mining: Q2 adjusted operating income decreased $2.2 million to $1.6 million; first-half income declined $2.1 million to $6.0 million. Coal volumes fell amid planned and unplanned customer power-plant outages.
Electric Utilities’ Q2 gross margin, a non-GAAP measure, decreased $3.4 million to $104.2 million; first-half gross margin increased $1.4 million to $213.9 million. Gas Utilities’ Q2 gross margin decreased $1.1 million to $108.5 million, while first-half gross margin rose $15.1 million to $312.3 million, largely due to new rates and weather.
Cash flow, debt and liquidity
- First-half operating cash flow was $289.8 million, down from $310.7 million. Capital expenditures were $317.7 million, versus $156.7 million; investing cash use was $317.3 million.
- Financing activities provided $13.6 million. The company issued $69 million net through its at-the-market stock program, paid $61.0 million in common dividends and had $102.5 million outstanding under its commercial paper program at June 30.
- At June 30, cash and cash equivalents were $6.6 million. Long-term debt was $3.050 billion, current maturities were $5.7 million and notes payable were $102.5 million. The $750 million revolving facility had $637 million of available capacity, after commercial paper and letters of credit.
- The company reported compliance with its debt covenants. Its consolidated indebtedness-to-capitalization covenant limit was 0.65 to 1.00. Long-term debt carrying value was $3.055 billion; disclosed fair value was $3.337 billion.
- Capital spending plans total $777 million for 2019, including $332 million spent in the first half. Management says capital plans may vary and is evaluating refinancing $200 million of senior notes due July 2020.
Outlook, developments and risks
- No specific earnings guidance is provided in the filing. The company declared a quarterly dividend of $0.505 per share, payable September 1, 2019, equivalent to $2.02 annually at that rate.
- Major projects include the $71 million, 60 MW Busch Ranch II wind farm, expected in service in fall 2019; the $54 million Natural Bridge gas pipeline, expected in service late 2019; and a $57 million, 40 MW Corriedale wind project, expected in 2020.
- Management estimates that returning Tax Cuts and Jobs Act benefits to customers will reduce cash flow by approximately $40–$45 million annually for each of the next several years. It also notes that a significant credit downgrade could trigger collateral requirements; management said liquidity was sufficient for potential postings at June 30.
- Rate and regulatory matters include a Wyoming Gas request for $16 million in new annual revenue and a Colorado Gas request for $2.5 million, both tied to safety, reliability and system-integrity investment. Approval and recovery are not assured.
- On August 2, 2019, the company filed with FERC for approval of a 60 MW, 20-year power purchase agreement beginning in 2023; the filing says a decision was expected by year-end 2019.
- Key operating sensitivities included adverse weather and flooding, utility operating-cost inflation, generation outages affecting mining sales, project execution and regulatory approvals. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether rate applications and requested safety-and-integrity recovery mechanisms are approved, and when they affect earnings and cash flow.
- Actual project costs, schedules and returns for Busch Ranch II, Corriedale, the Natural Bridge pipeline and planned transmission investment.
- Funding needs and terms for the July 2020 senior-note maturity, including future use of debt and ATM equity issuance.
- Whether operating cash flow can sustain the elevated capital program and dividend while absorbing the stated TCJA-related customer refunds.
- How weather, flooding, power-plant availability, and customer generation outages affect utility margins and coal volumes in subsequent periods.