Black Hills Corporation — Q1 2019 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2019, compared with Q1 2018. Black Hills operates regulated electric and gas utilities, power generation and coal mining in the United States. Results are seasonal; the company cautions that first-quarter performance is not necessarily indicative of full-year results. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $597.8 | $575.4 |
| Operating income | $160.1 | $148.3 |
| Income from continuing operations | $107.4 | $139.0 |
| Net income available to common shareholders | $103.8 | $133.0 |
| Diluted EPS | $1.73 | $2.46 |
| Operating cash flow | $175.9 | $169.9 |
| Cash capital expenditures | $144.1 | $70.0 |
Revenue increased 3.9% and operating income increased 8.0%; operating margin was approximately 26.8%, versus 25.8% in the prior-year quarter. Common net income fell about 22%, principally reflecting the prior-year tax benefit described below. Interest expense was approximately $36.0 million in both periods. There was no discontinued-operations loss in Q1 2019; Q1 2018 included a $2.3 million loss.
Segment performance: Adjusted operating income, the company’s segment measure, rose to $41.0 million from $38.5 million for Electric Utilities and to $103.3 million from $95.4 million for Gas Utilities. Power Generation reported $12.0 million versus $11.8 million; Mining reported $4.3 million versus $4.3 million. Corporate and Other adjusted loss improved to $0.5 million from $1.7 million. The company changed its segment performance measure and recast comparative segment disclosures; the change did not affect consolidated operating income.
Balance sheet, debt and liquidity
- At March 31, 2019, cash and cash equivalents were $12.2 million; total assets were $7.04 billion and total equity was $2.38 billion.
- Debt comprised $2.950 billion of long-term debt, $5.7 million of current maturities and $164.7 million of commercial paper, approximately $3.12 billion in total. Commercial paper’s weighted-average rate was 2.70% at quarter-end.
- The $750 million revolving credit facility had no borrowings, $14 million of letters of credit and $571 million of available capacity. The facility and commercial-paper program share the $750 million limit and are backstopped by the facility.
- The consolidated indebtedness-to-capitalization ratio was 58.1%, below the 65% covenant maximum; the company reported covenant compliance. Corporate ratings were BBB+ (S&P and Fitch) and Baa2 (Moody’s), all with stable outlooks.
- Operating cash flow rose $6.0 million year over year, while investing cash use increased to $145.0 million, mainly reflecting higher capital spending. Financing cash use was $39.3 million. Cash, cash equivalents and restricted cash ended the quarter at $15.7 million.
Changes, outlook and notable items
- Tax comparison: Q1 2019 recorded $17.3 million of income tax expense, versus a $25.8 million tax benefit in Q1 2018. The prior period included a $49 million benefit from legal-entity restructuring, partly offset by $2.3 million of tax-reform-related expense. Current-period tax benefits included $3.4 million from forecast production and investment tax credits and $1.8 million from deferred-tax amortization related to tax reform; the latter is offset by reduced utility revenue.
- Drivers: Management attributed utility growth partly to colder weather and new gas rates. Heating degree days were 7% above normal for electric utilities and 11% above normal for gas utilities. Higher outside-services and employee costs partly offset utility margin gains.
- Capital plans: Planned 2019 capital expenditures were $777 million, including $464 million for Gas Utilities, $205 million for Electric Utilities and $84 million for Power Generation. The company cited increased programmatic integrity spending. It began construction of the $71 million, 60-MW Busch Ranch II wind project in March, with service expected in 2019.
- Funding and dividends: Management expects to issue an additional $60–$80 million of common stock through its at-the-market program during the rest of 2019; approximately $20 million net was issued in Q1. The company was evaluating refinancing for $200 million of senior notes and a $300 million term loan, both due in 2020. The quarterly dividend was $0.505 per share; a same-rate dividend payable June 1, 2019 was declared after quarter-end.
- Tax-related cash needs: Management estimated that providing Tax Cuts and Jobs Act benefits to customers would reduce cash flows by approximately $40–$45 million annually for each of the next several years. It reported agreements with regulators in six states and ongoing work with regulators in a seventh state and FERC.
- Regulatory matters: Gas utilities filed applications in Nebraska and Wyoming to consolidate utility entities and tariffs. Colorado Gas requested tariff and service-area consolidation and $2.5 million of additional annual revenue for safety, reliability and system-integrity investments; approval was pending.
- The company identified no material changes to previously disclosed risk factors or critical accounting estimates. It adopted the new lease standard on January 1, 2019, recording lease assets and liabilities; the cumulative retained-earnings adjustment was $3.4 million.
Important facts for investors to verify
- Whether utility rate and tariff-consolidation requests, including Colorado’s $2.5 million revenue request, receive regulatory approval and on what terms.
- Whether planned capital spending, the Busch Ranch II project and integrity programs remain on schedule and within budget, and how they are financed.
- Progress on refinancing the $200 million notes and $300 million term loan due in 2020, and the implications of planned ATM share issuance for dilution.
- Actual cash-flow effects of returning TCJA benefits to customers, including the stated annual $40–$45 million impact.
- Whether earnings trends persist outside the winter heating season, given the company’s stated seasonality and weather sensitivity.