Business context and reporting period
Black Hills Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the same quarter of 2019. The company operates regulated electric and gas utilities, power generation and coal mining businesses in the United States. Results are seasonal, particularly for gas utilities.
Financial performance and position
Amounts below are in millions of dollars, except per-share data.
| Metric | Q1 2020 | Q1 2019 or prior balance |
|---|---|---|
| Revenue | $537.1 | $597.8 |
| Operating income | $153.2 | $160.1 |
| Net income | $97.2 | $107.4 |
| Net income available to common shareholders | $93.2 | $103.8 |
| Diluted EPS | $1.51 | $1.73 |
| Cash from operating activities | $192.0 | $175.9 |
| Capital expenditures | $171.9 | $144.1 |
| Cash and cash equivalents at quarter-end | $54.1 | $9.8 at Dec. 31, 2019 |
| Total debt, including notes payable and current maturities | Approximately $3,462 | Approximately $3,495 at Dec. 31, 2019 |
- Revenue fell about 10% year over year, primarily reflecting warmer winter weather and lower natural gas and electric utility demand. Fuel and purchased-energy costs also declined.
- Operating income declined about 4%; net income available to common shareholders fell about 10%. Diluted EPS decreased from $1.73 to $1.51, with higher weighted-average shares also affecting per-share results.
- Utility gross margin, a company-defined non-GAAP measure, was nearly unchanged for Electric Utilities ($109.7 versus $109.6) and increased for Gas Utilities ($205.4 versus $203.8). Gas margin gains from new rates, customer growth and other items were largely offset by weather.
- Operating cash flow increased by $16.1 million. Capital expenditures exceeded operating cash flow by about $20 million. Investing cash outflow was $173.1 million.
- At March 31, the company reported $319.1 million of short-term borrowings and $3.14 billion of long-term debt, net of current maturities. Liquidity was reported as $468 million, including cash and available revolving-credit capacity. The debt-to-capitalization covenant ratio was 58.2%, below the 65% limit.
- Stockholders’ equity increased following a February issuance of 1.2 million shares, raising $99 million net of issuance costs. The quarterly dividend was $0.535 per share; the board declared the same dividend for payment in June.
Material changes, outlook and risks
- The principal unusual item was a $6.9 million non-cash pre-tax impairment of the company’s investment in a privately held oil and gas company, related to weaker gas-price expectations and liquidity concerns. The remaining carrying value was $1.5 million.
- Management said COVID-19 had not materially affected Q1 results or operations, but suspended customer disconnections for non-payment and continued to monitor collections, bad-debt exposure, customer demand, supply chains and capital markets. The full-year impact remained uncertain.
- Management did not anticipate a significant impact on the 2020 capital program at the filing date. Planned 2020 capital expenditures were $669 million, including $391 million for Gas Utilities and $246 million for Electric Utilities. Corriedale wind construction was ongoing; delay beyond year-end could put production tax credits at risk.
- No specific full-year earnings guidance is stated in the provided filing text. Management cited potential pandemic effects including weaker commercial and industrial demand, increased credit losses, project delays, commodity volatility, higher operating costs and regulatory actions.
- Colorado Gas’s rate proceeding was resolved by the CPUC after quarter-end largely in line with the administrative law judge’s recommendation, including a lower 9.2% return on equity; a final order and new rates were expected in Q2 2020. The requested territory consolidation and recovery rider were not accepted. Wyoming Gas’s new statewide rates took effect March 1 and were expected to generate $13 million in annual new revenue.
- A proposed 20-year, 60 MW Wygen I power purchase agreement remained in a FERC-monitored settlement process, with a hearing possible if settlement is unsuccessful. The company reported adequate liquidity and covenant compliance at quarter-end; credit-market access, customer payment behavior and pandemic duration remained uncertainties.
Important facts for investors to verify
- Whether COVID-19 materially changes customer collections, bad-debt allowances, utility load or access to financing after March 31.
- Actual 2020 capital spending versus the $669 million plan, and the schedule and tax-credit eligibility of the Corriedale project.
- Final Colorado Gas rate terms and the outcome of negotiations or further proceedings over the Wygen I PPA.
- Quarter-end liquidity, short-term borrowing levels, covenant headroom and the company’s planned refinancing of short-term debt.
- The continuing effect of unusually warm weather and the $6.9 million investment impairment on subsequent-period earnings.