Black Hills Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company operates regulated electric and gas utilities, power generation, coal mining, and oil and gas businesses. Unless otherwise indicated, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $342.1 million | $333.8 million | $1,244.1 million | $1,109.2 million |
| Operating income | $78.5 million | $58.4 million | $294.9 million | $167.3 million |
| Net income available to common stock | $27.7 million | $14.1 million | $126.4 million | $54.8 million |
| Diluted EPS | $0.50 | $0.26 | $2.29 | $1.04 |
| Dividends declared per share | $0.445 | $0.420 | $1.335 | $1.260 |
- Operating margin, calculated as operating income divided by revenue, was approximately 22.9% in Q3 2017 versus 17.5% in Q3 2016, and 23.7% for the first nine months versus 15.1%.
- Cash from operations for the first nine months was $319.4 million, compared with $209.2 million in 2016. Capital expenditures were $256.1 million; investing cash outflow was $256.4 million. Financing cash outflow was $63.1 million. Cash and cash equivalents at September 30 were $13.5 million.
- At September 30, total long-term debt, including current maturities, was $3.116 billion; notes payable were $225.2 million. The company had $500 million of available capacity under its $750 million combined revolving-credit and commercial-paper limit. Commercial-paper borrowings carried a 1.46% weighted-average rate.
- The consolidated indebtedness-to-capitalization ratio was 61%, within the 65% covenant limit; the company reported covenant compliance.
- Total assets were $6.551 billion and total equity was $1.796 billion. Planned capital expenditures were $357 million for 2017 and $430 million for 2018.
Changes versus comparable periods
- Q3 common earnings rose $13.5 million year over year, principally due to lower oil-and-gas impairment charges, lower corporate acquisition-related costs, and stronger Electric Utilities earnings. Lower Gas Utilities earnings partly offset these gains.
- Nine-month common earnings increased $71.6 million. Management cited higher Gas Utilities, Electric Utilities, and Mining earnings; lower corporate costs; and the absence of prior-year oil-and-gas impairments. Lower Power Generation earnings and prior-year tax benefits partly offset the increase.
- Revenue for the first nine months increased $134.9 million. Comparisons are affected by SourceGas, acquired in February 2016: 2017 includes nine months of its results, while 2016 includes approximately 7.5 months.
- There were no oil-and-gas impairment charges in the first nine months of 2017, compared with $52.3 million in 2016. The prior-year charge included a $38 million ceiling-test impairment and a $14 million impairment of other depreciable properties.
- Q3 Gas Utilities recorded a $4.3 million loss, versus a $2.9 million loss, as cooler summer weather and greater precipitation reduced agricultural irrigation demand. For the nine-month period, Gas Utilities earnings rose to $41.4 million from $30.0 million, substantially reflecting the fuller SourceGas comparison.
Outlook, management commentary and risks
- Oil and gas exit: On November 1, 2017, after quarter-end, the board approved divesting all Oil and Gas assets and exiting the business. Management anticipated completing disposals by year-end 2018. The segment remained in continuing operations at September 30; the company expected held-for-sale and discontinued-operations presentation beginning in Q4 2017. Further impairment charges are possible. The company disclosed agreements to sell certain San Juan and Powder River Basin assets for a combined $28 million, subject to closing conditions, including government approvals for the San Juan transaction.
- Liquidity and financing: Management said cash, operating cash flows, borrowing capacity, and access to debt and equity financing should be sufficient for operations, debt maturities, dividends, and planned capital expenditures. It also highlighted seasonal cash needs, commodity prices, capital projects, regulatory requirements, and market conditions as factors that could affect liquidity. A material credit downgrade could require collateral under commodity contracts.
- Rates and regulation: South Dakota Electric entered a six-year rate moratorium effective July 1, 2017, with specified rider suspensions and regulatory-asset amortization that increases annual expense by about $2.7 million. Colorado Electric appealed a rate-case decision limiting its requested annual revenue increase; timing of a court ruling was uncertain. RMNG filed for a $2.2 million annual revenue increase and extension of its safety-and-integrity rider.
- Weather and operations: Utility results are seasonal; gas utilities typically earn about 70% of revenue and margins in the first and fourth quarters. Q3 2017 weather and precipitation reduced agricultural gas demand. Oil-and-gas production also declined, and a Piceance gathering and processing contract requires payment on a minimum 20,000 Mcf per day regardless of volumes delivered.
- Other uncertainties: Management was evaluating proposed federal tax reform and said potential effects could be material but could not yet be determined. Divestiture proceeds and completion are uncertain; the filing identifies potential sale costs, buyer availability, personnel retention, and additional impairments as risks. No material changes to previously disclosed risk factors were reported apart from divestiture-related risks.
- No formal earnings guidance: The filing provides capital expenditure plans and management’s liquidity assessment, but does not provide a clear earnings or EPS forecast.
Important facts for investors to verify
- Progress, terms, proceeds, approvals, and any impairment effects from the planned Oil and Gas divestiture.
- Whether earnings growth persists after accounting for prior-year impairments, acquisition costs, tax items, and the uneven SourceGas comparison.
- Available liquidity and covenant headroom as commercial-paper borrowings, capital expenditures, and seasonal working-capital needs change.
- Outcomes of the Colorado Electric appeal and RMNG rate review, and the earnings impact of the South Dakota rate moratorium.
- Effects of weather, commodity prices, and the Piceance minimum-volume commitment on utility and oil-and-gas results and cash flows.
- Potential effects of federal tax legislation and the company’s planned dividend and financing needs.