Black Hills Corporation — FY 2017 Form 10-K
Business context and reporting period. Annual report for the year ended December 31, 2017, filed February 23, 2018. Black Hills is a U.S. vertically integrated utility operating regulated electric and gas businesses, power generation, and coal mining. At year-end it served approximately 210,000 electric and 1.04 million gas customers. Oil and gas results are reported as discontinued operations following the November 2017 decision to exit that business.
Financial performance and position
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue from continuing operations | $1.680 billion | $1.539 billion |
| Operating income | $416.7 million | $336.2 million |
| Income from continuing operations available to common shareholders | $194.1 million | $137.1 million |
| Net income available to common shareholders | $177.0 million | $73.0 million |
| Diluted EPS, continuing operations / total | $3.52 / $3.21 | $2.57 / $1.37 |
| Cash from operating activities | $428.3 million | $320.5 million |
| Capital expenditures, continuing operations | $337.7 million | $460.5 million |
At December 31, 2017, cash and cash equivalents were $15.4 million, short-term debt including current maturities was $217.0 million, and long-term debt net of current maturities and financing costs was $3.109 billion. Stockholders’ equity was $1.709 billion. The reported capitalization mix was 66% total debt and 34% common equity. The $750 million revolving facility and commercial paper program had $512 million of available capacity after $211 million of commercial paper and $27 million of letters of credit.
Margins and segments. Electric Utilities’ non-GAAP gross margin was $436.2 million, up $20.3 million. Gas Utilities’ non-GAAP gross margin was $538.0 million, up $51.8 million; segment net income available to common shareholders was $65.8 million. Electric Utilities’ corresponding earnings were $110.1 million, Power Generation $46.5 million, and Mining $14.4 million. Consolidated operating margin as a percentage of revenue was approximately 24.8% (calculated from reported GAAP operating income and revenue); gross margin figures are company-defined non-GAAP measures.
Changes versus the prior comparable period
- Continuing-operations revenue increased approximately 9% and continuing-operations income available to common shareholders increased approximately 42%. Growth reflected a full year of SourceGas results in 2017 versus about 10.5 months in 2016, utility investment returns, and lower SourceGas acquisition and transition costs.
- Operating cash flow rose by $107.8 million. Investing cash outflow fell substantially, largely because 2016 included the SourceGas acquisition; 2017 investing outflow was $317.7 million versus $1.589 billion.
- Electric gross margin improved on returns from the Peak View wind project, transmission recovery riders, and higher commercial and industrial demand. Gas gross margin growth primarily reflected the additional months of SourceGas operations.
- Discontinued-operations loss narrowed to $17.1 million from $64.2 million, including a $13 million after-tax held-for-sale impairment in 2017 versus $67 million of after-tax oil and gas impairments in 2016.
Outlook, commentary, risks, and unusual items
- Outlook and investment: Management expects growth primarily through utility capital investment, operating efficiencies, and cost reduction. Forecast capital expenditures are $431 million in 2018, $506 million in 2019, and $406 million in 2020. The filing does not provide a specific earnings or EPS forecast. Management targeted a 50%–60% dividend payout ratio; the board declared a 2018 annualized dividend rate of $1.90 per share, a 5% increase over 2017 dividends paid.
- Tax reform: The December 2017 TCJA reduced the federal corporate rate from 35% to 21%. Revaluation reduced deferred tax assets and liabilities by about $309 million; approximately $301 million associated with regulated utilities was recorded as a regulatory liability, while the remaining roughly $8 million produced a one-time noncash tax benefit. Management estimated the lower tax rate could reduce annual cash flows by $35–$45 million for several years as customer benefits and working-capital effects take hold. Some tax amounts remained provisional.
- Oil and gas divestiture: More than 90% of oil and gas properties had been sold or contracted for sale as of February 23, 2018; management expected to complete remaining disposals by mid-2018. Completion, sale proceeds, operating costs until closing, and further valuation adjustments remain relevant uncertainties.
- Regulatory and environmental exposure: Rate recovery is subject to commission decisions. Arkansas, Wyoming, and RMNG rate filings were pending; Colorado Electric’s appeal of a rate decision also remained pending. If a challenge to the EPA’s Wyodak Regional Haze determination fails, Black Hills estimated its share of additional capital investment could be about $40 million. The company also cited manufactured-gas-plant remediation, mine reclamation, emissions rules, weather, plant reliability, cyber risk, and commodity and financing risks.
- Unusual commitments: The company reported $819.6 million of unconditional purchase obligations, including power, fuel transportation, storage, and coal arrangements; $3.138 billion of scheduled long-term debt principal; and $58.2 million of guarantees supporting subsidiary reclamation and surety bonds. The Wygen I purchase option, if exercised at year-end 2017, was estimated at approximately $133 million.
Key investor verification points
- Confirm the distinction between continuing-operations EPS ($3.52 diluted) and total diluted EPS ($3.21), and identify the tax and discontinued-operations effects embedded in reported earnings.
- Track the oil and gas asset sales through closing, including final proceeds, remaining costs, and any additional impairment.
- Review regulatory outcomes for pending rate applications and the treatment and timing of the $301 million tax-reform regulatory liability and customer rate benefits.
- Assess the funding plan for the $431 million–$506 million annual capital program, near-term debt maturities, commercial paper usage, and planned 2018 remarketing of the junior subordinated notes.
- Evaluate environmental and contingency exposure, particularly the potential Wyodak controls investment, remediation estimates, and the recoverability of costs through rates.