Black Hills Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Black Hills operates regulated electric and gas utilities, power generation and coal mining. Oil and gas operations are reported as discontinued operations following the planned divestiture.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $355.7 million | $341.8 million | $931.1 million | $889.4 million |
| Operating income | $69.6 million | $69.8 million | $217.8 million | $220.0 million |
| Net income available to common stock | $21.9 million | $22.2 million | $154.9 million | $98.7 million |
| Diluted EPS, continuing operations | $0.45 | $0.41 | $2.94 | $1.83 |
| Diluted EPS, total | $0.40 | $0.40 | $2.85 | $1.79 |
| Cash from operations | Not separately stated for Q2 | Not separately stated for Q2 | $310.7 million | $262.9 million |
Q2 revenue rose 4.1%, while operating income was nearly unchanged; operating margin was approximately 19.5%, versus 20.4% a year earlier. Six-month revenue increased 4.7%, but operating income declined slightly. First-half continuing-operations income included a $49 million deferred tax benefit from legal-entity restructuring; without that item, the reported increase in earnings would be materially smaller. The company recorded discontinued-operation losses of $2.4 million in Q2 and $4.8 million for the first half.
First-half cash from operations increased by $47.8 million. Investing cash use was $163.5 million, including $156.7 million of property, plant and equipment additions and a $24.4 million investment. Financing cash use was $153.7 million, including $50.9 million of common dividends. Cash, cash equivalents and restricted cash totaled $11.7 million at June 30.
Balance sheet, debt and liquidity
- At June 30, total debt was approximately $3.24 billion: $121.8 million of commercial paper, $255.7 million of current maturities and $2.86 billion of long-term debt.
- Current assets were $380.7 million and current liabilities $730.6 million. Cash and cash equivalents were $8.6 million, plus $3.1 million of restricted cash.
- The $750 million revolving credit facility had $617 million of available capacity at June 30, after $122 million of commercial paper and $11 million of letters of credit. The commercial-paper weighted-average rate was 2.29% at period-end.
- The debt-to-capitalization covenant ratio was 58%, below the 65% maximum; the company reported compliance at June 30.
- After quarter-end, the company extended its $750 million revolver to July 2023 and amended a $300 million term loan to mature in July 2020. A $250 million senior note was classified as current and due January 2019.
Material changes and management commentary
- Q2 continuing earnings improved to $24.3 million attributable to common stock from $22.8 million. Electric Utilities contributed higher earnings, while Gas Utilities and Power Generation earnings declined. Warmer weather, transmission investment recovery and commercial and industrial demand supported electric results; higher maintenance costs weighed on generation.
- First-half Gas Utilities earnings rose to $106.5 million from $45.7 million, principally because of the $49 million tax benefit, colder weather and higher gas sales. Electric Utilities earnings were broadly steady; Power Generation earnings declined.
- Federal tax reform reduced the federal corporate rate from 35% to 21%. The company estimated that the lower rate would reduce cash flows by approximately $35 million to $45 million annually for several years, while it works with regulators to pass benefits to customers.
- The company reserved approximately $23 million against utility revenue in the first half for customer tax benefits; approximately $19 million remained reserved at June 30. Approvals for customer benefits had been received in four states, with other regulatory discussions continuing.
- Nearly all oil and gas assets had been sold by June 30; final closings and accounting were expected in Q3 2018. The filing reported no further held-for-sale asset write-down in the first half after a $13 million after-tax write-down in 2017.
Outlook, risks and contingencies
- Planned capital expenditures are $478 million for 2018, $597 million for 2019 and $406 million for 2020. The plans include the Busch Ranch II wind project and Natural Bridge gas pipeline.
- The company declared a $0.475-per-share quarterly dividend, or $1.90 annualized, payable September 1, 2018. Future dividends depend on financial condition, cash generation, capital needs and debt restrictions.
- Management said operating cash flows, borrowing capacity and access to debt and equity markets should fund ongoing needs. Liquidity remains exposed to seasonal utility demand, commodity prices, capital spending, regulatory requirements and market conditions.
- Natural-gas hedging and wholesale commodity contracts create market, counterparty and potential collateral-posting exposure. A significant credit downgrade could increase collateral requirements.
- Utility rate proceedings and regulatory decisions—including the timing and amount of tax-reform benefits returned to customers—could affect results and cash flows. Utility operations are seasonal; first-half results are not necessarily indicative of full-year results.
- The filing reported no material changes to previously disclosed risk factors or contingencies. Disclosure controls were considered effective at June 30, 2018.
Important facts for investors to verify
- The extent to which first-half earnings growth depends on the one-time $49 million tax benefit, and the company’s earnings outlook excluding that benefit.
- Progress on regulatory approvals, customer tax-benefit refunds and the remaining $19 million reserve.
- Refinancing or repayment plans for the $250 million January 2019 note and the effect of the Equity Unit settlement expected in November 2018.
- Actual capital spending versus the 2018–2020 plan, and funding needs relative to operating cash flow and available credit.
- Completion of remaining oil and gas asset sales and final settlement of associated liabilities.