BLACK HILLS CORPORATION The following discussions should be read in conjunction with the Notes contained herein and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in the 2022 Form 10-K.
Executive Summary
We are a customer-focused energy solutions provider with a mission of Improving
Life with Energy for more than 1.3 million customers and 800+ communities we
serve. Our vision to be the Energy Partner of Choice directs our strategy to
invest in the safety, sustainability and growth of our eight-state service
territory, including Arkansas , Colorado , Iowa , Kansas , Montana , Nebraska , South
Dakota and Wyoming , and to meet our essential objective of providing safe,
reliable and cost-effective electricity and natural gas.
We conduct our business operations through two operating segments:
We have provided energy and served customers for 139 years, since the 1883 gold rush days inDeadwood, South Dakota . Throughout our history, the common thread that unites the past to the present is our commitment to serve our customers and communities. By being responsive and service focused, we can help our customers and communities thrive while meeting rapidly changing customer expectations. Recent Developments
Business Segment Recent Developments
•
See Note 2 of the Condensed Notes to Consolidated Financial Statements for
recent rate review activity for
•
InMarch 2023 , the CPUC approved a unanimous settlement forColorado Electric's Clean Energy Plan filedMay 25, 2022 . The Clean Energy Plan is expected to add approximately 400 MW of new clean energy resources needed to reduce carbon emissions 80% by 2030.Gas Utilities •
See Note 2 of the Condensed Notes to Consolidated Financial Statements for recent rate review activity for RMNG.
Corporate and Other
•
OnMarch 7, 2023 , we completed a public debt offering of$350 million , 5.95% 5-year senior unsecured notes dueMarch 15, 2028 . The proceeds from the offering were used to repay notes outstanding under our commercial paper program and for other general corporate purposes. See Note 5 of the Condensed Notes to Consolidated Financial Statements for further information. Results of Operations Certain lines of business in which we operate are highly seasonal, and revenue from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Demand for electricity and natural gas is sensitive to seasonal cooling, heating and industrial load requirements. In particular, the normal peak usage season for ourElectric Utilities is June through August while the normal peak usage season for ourGas Utilities is November through March. Significant earnings variances can be expected between theGas Utilities segment's peak and off-peak seasons. Due to this seasonal nature, our results of operations for the three months endedMarch 31, 2023 and 2022, and our financial condition as ofMarch 31, 2023 andDecember 31, 2022 , are not necessarily indicative of the results of operations and financial condition to be expected as of or for any other period or for the entire year. Segment information does not include inter-company eliminations and all amounts are presented on a pre-tax basis unless otherwise indicated. Minor differences in amounts may result due to rounding. 26
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Consolidated Summary and Overview
Three Months Ended March 31,
2023 2022
(in thousands, except per share amounts)
Operating income (loss):
Electric Utilities $ 61,060 $ 50,746
Gas Utilities 114,625 123,540
Corporate and Other (802 ) (933 )
Operating income 174,883 173,353
Interest expense, net (43,504 ) (38,545 )
Other income, net 674 704
Income tax (expense) (14,673 ) (14,488 )
Net income 117,380 121,024
Net income attributable to non-controlling interest (3,296 ) (3,498 )
Net income available for common stock $ 114,084 $ 117,526
Total earnings per share of common stock, Diluted $ 1.73 $ 1.82
Three Months Ended
The variance to the prior year included the following:
•
Electric Utilities' operating income increased$10 million primarily due to a one-time gain on the planned sale of Northern Iowa Windpower assets, new rates and rider recovery, and increased transmission services and off-system excess energy sales partially offset by higher generation-related expenses and employee costs;
•
•
Interest expense increased
Segment Operating Results
A discussion of operating results from our business segments follows.
Non-GAAP Financial Measures
The following discussion includes financial information prepared in accordance
with GAAP, as well as another financial measure, Electric and Gas Utility
margin, that is considered a "non-GAAP financial measure." Generally, a non-GAAP
financial measure is a numerical measure of a company's financial performance,
financial position or cash flows that excludes (or includes) amounts that are
included in (or excluded from) the most directly comparable measure calculated
and presented in accordance with GAAP. Electric and Gas Utility margin (revenue
less cost of sales) is a non-GAAP financial measure due to the exclusion of
operation and maintenance expenses, depreciation and amortization expenses, and
property and production taxes from the measure.
Electric Utility margin is calculated as operating revenue less cost of fuel and
purchased power. Gas Utility margin is calculated as operating revenue less cost
of natural gas sold. Our Electric and Gas Utility margin is impacted by the
fluctuations in power and natural gas purchases and other fuel supply costs.
However, while these fluctuating costs impact Electric and Gas Utility margin as
a percentage of revenue, they only impact total Electric and Gas Utility margin
if the costs cannot be passed through to our customers.
Our Electric and Gas Utility margin measure may not be comparable to other
companies' Electric and Gas Utility margin measures. Furthermore, this measure
is not intended to replace operating income as determined in accordance with
GAAP as an indicator of operating performance.
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Table of ContentsElectric Utilities Operating results for theElectric Utilities were as follows (in thousands): Three Months Ended March 31, 2023 2022 Variance Revenue: Electric - regulated$ 206,702 $ 195,725 $ 10,977 Other - non-regulated 12,007 10,813 1,194 Total revenue 218,709 206,538 12,171 Cost of fuel and purchased power: Electric - regulated 54,650 51,479 3,171 Other - non-regulated 766 931 (165 )
Total cost of fuel and purchased power 55,416 52,410 3,006
Electric Utility margin (non-GAAP) 163,293 154,128 9,165
Operations and maintenance 67,154 69,669 (2,515 ) Depreciation and amortization 35,079 33,713 1,366 Total operating expenses 102,233 103,382 (1,149 ) Operating income$ 61,060 $ 50,746 $ 10,314
Three Months Ended
Electric Utility margin increased as a result of the following:
(in millions)
New rates and rider recovery $ 4.6
Transmission services and off-system excess energy sales 2.9
Integrated Generation (a) 2.1
Other (0.4 )
$ 9.2
(a)Primarily driven by favorable mining contract pricing.
Operations and maintenance expense decreased primarily due to a one-time$7.7 million gain on the planned sale of Northern Iowa Windpower assets partially offset by$2.9 million of higher employee-related expenses and$2.9 million of higher Integrated Generation expenses driven by a planned outage and higher fuel and materials costs.
Depreciation and amortization increased primarily due to a higher asset base driven by prior year capital expenditures.
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Operating Statistics
Revenue (in thousands) Quantities Sold (MWh)
Three Months Ended March 31, Three Months Ended March 31,
2023 2022 2023 2022
Residential $ 59,798 $ 62,249 393,870 391,582
Commercial 62,072 64,353 510,790 490,418
Industrial 38,948 35,408 455,942 463,768
Municipal 4,267 4,575 35,766 35,305
Subtotal Retail Revenue -
Electric 165,085 166,585 1,396,368 1,381,073
Contract Wholesale 5,404 5,923 144,791 182,207
Off-system/Power Marketing
Wholesale 16,124 7,154 256,856 160,441
Other (a) 20,089 16,063 - -
Total Regulated 206,702 195,725 1,798,015 1,723,721
Non-Regulated (b) 12,007 10,813 54,346 89,094
Total Revenue and Quantities
Sold $ 218,709 $ 206,538 1,852,361 1,812,815
Other Uses, Losses or
Generation, net (c) 138,305 113,286
Total Energy 1,990,666 1,926,101
(a)
Primarily related to transmission revenues from the Common Use System.
(b)
Includes Integrated Generation and non-regulated services to our retail
customers under the Service Guard Comfort Plan and Tech Services.
(c)
Includes company uses and line losses.
Revenue (in thousands) Quantities Sold (MWh)
Three Months Ended March 31, Three Months Ended March 31,
2023 2022 2023 2022
Colorado Electric $ 73,795 $ 75,445 604,543 619,588
South Dakota Electric 86,614 78,597 708,821 644,223
Wyoming Electric 46,671 42,089 484,651 459,910
Integrated Generation 11,629 10,407 54,346 89,094
Total Revenue and Quantities Sold $ 218,709
1,852,361 1,812,815
Three Months Ended March 31,
Quantities Generated and Purchased by Fuel
Type (MWh) 2023 2022
Generated:
Coal 674,947 663,438
Natural Gas and Oil 501,066 296,422
Wind 230,724 253,568
Total Generated 1,406,737 1,213,428
Purchased:
Coal, Natural Gas, Oil and Other Market
Purchases 489,816 588,160
Wind 94,113 124,513
Total Purchased 583,929 712,673
Total Generated and Purchased 1,990,666 1,926,101
Three Months Ended March 31,
Quantities Generated and Purchased (MWh) 2023 2022
Generated:
Colorado Electric 160,201 85,431
South Dakota Electric 564,044 455,605
Wyoming Electric 230,562 204,598
Integrated Generation 451,930 467,794
Total Generated 1,406,737 1,213,428
Purchased:
Colorado Electric 197,624 300,397
South Dakota Electric 156,972 197,063
Wyoming Electric 209,793 190,805
Integrated Generation 19,540 24,408
Total Purchased 583,929 712,673
Total Generated and Purchased 1,990,666 1,926,101
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Three Months Ended March 31,
2023 2022
Degree Days Actual Variance from Normal Actual Variance from
Normal
Heating Degree Days:
Colorado Electric 2,751 8% 2,715 8%
South Dakota Electric 3,446 5% 3,248 (1)%
Wyoming Electric 3,301 10% 3,132 4%
Combined (a) 3,099 7% 2,981 4%
(a)
Degree days are calculated based on a weighted average of total customers by
state.
Three Months Ended March 31,
Contracted generating facilities
Availability by fuel type (a) 2023 2022
Coal 92.7% 90.6%
Natural gas and diesel oil 94.3% 95.3%
Wind 92.5% 95.6%
Total Availability 93.6% 94.1%
Wind Capacity Factor 48.1% 42.0%
(a)Availability and Wind Capacity Factor are calculated using a weighted average based on capacity of our generating fleet.
Operating results for the
Three Months Ended March 31,
2023 2022 Variance
Revenue:
Natural gas - regulated $ 674,773 $ 596,458 $ 78,315
Other - non-regulated 32,143 24,934 7,209
Total revenue 706,916 621,392 85,524
Cost of natural gas sold:
Natural gas - regulated 454,107 383,712 70,395
Other - non-regulated 16,859 1,015 15,844Total cost of natural gas sold 470,966 384,727 86,239
Gas Utility margin (non-GAAP) 235,950 236,665 (715 )
Operations and maintenance 94,827 86,441 8,386 Depreciation and amortization 26,498 26,684 (186 ) Total operating expenses
121,325 113,125 8,200
Operating income $ 114,625 $ 123,540 $ (8,915 ) Three Months Ended
Gas Utility margin decreased as a result of the following:
(in millions)
New rates and rider recovery $
5.2
Non-residential retail growth and demand
3.4
Residential growth and usage
0.9
Mark-to-market on non-utility natural gas commodity contracts (7.0 )
Weather (2.3 )
Other (0.9 )
$ (0.7 )
Operations and maintenance expense increased primarily due to
Depreciation and amortization was comparable to the same period in the prior year.
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Operating Statistics
Revenue (in thousands) Quantities Sold and Transported (Dth)
Three Months Ended March 31, Three Months Ended March 31,
2023 2022 2023 2022
Residential $ 428,576 $ 376,044 29,935,584 31,814,250
Commercial 182,523 158,642 14,004,072 14,631,703
Industrial 9,199 9,238 1,038,433 1,164,583
Other 1,444 2,772 - -
Total Distribution 621,742 546,696 44,978,089 47,610,536
Transportation and
Transmission 53,031 49,762 47,179,540 45,045,203
Total Regulated 674,773 596,458 92,157,629 92,655,739
Non-regulated Services (a) 32,143 24,934 - -
Total Revenue and
Quantities Sold $ 706,916 $ 621,392 92,157,629 92,655,739
(a)
Includes
Revenue (in thousands) Quantities Sold and Transported (Dth)
Three Months Ended March 31, Three Months Ended March 31,
2023 2022 2023 2022
Arkansas Gas $ 126,637 $ 127,809 11,475,750 12,927,736
Colorado Gas 144,886 120,053 14,055,294 13,418,684
Iowa Gas 125,457 120,579 14,291,408 15,376,182
Kansas Gas 72,221 58,851 11,173,502 10,989,067
Nebraska Gas 164,950 134,234 27,080,790 27,335,774
Wyoming Gas 72,765 59,866 14,080,885 12,608,296
Total Revenue and
Quantities Sold $ 706,916 $ 621,392 92,157,629 92,655,739
Three Months Ended March 31,
2023 2022
Heating Degree Days Actual Variance from Normal Actual Variance from Normal
Arkansas Gas (a) 1,666 (18)% 2,099 ---%
Colorado Gas 3,087 10% 2,946 1%
Iowa Gas 3,247 (6)% 3,579 6%
Kansas Gas (a) 2,373 (4)% 2,584 5%
Nebraska Gas 3,054 ---% 3,041 ---%
Wyoming Gas 3,624 21% 3,272 3%
Combined (b) 3,196 4% 3,165 2%
(a)
Arkansas Gas and Kansas Gas have weather normalization mechanisms that mitigate
the weather impact on gross margins.
(b)
The combined heating degree days are calculated based on a weighted average of
total customers by state excluding Kansas Gas due to its weather normalization
mechanism. Arkansas Gas is partially excluded based on the weather normalization
mechanism in effect from November through April.
Corporate and Other
Corporate and Other operating results were as follows (in thousands):
Three Months Ended March 31,
2023 2022 Variance
Operating (loss) $ (802 ) $ (933 ) $ 131 Three Months Ended
Operating loss was comparable to the same period in the prior year.
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Consolidated Interest Expense, Other Income and Income Tax Expense
Three Months Ended March 31,
2023 2022 Variance
(in thousands)
Interest expense, net
(14,673 ) (14,488 ) (185 )
Three Months Ended
Interest Expense, net
The increase in Interest expense, net was due to higher interest rates.
Other Income, net
Other income, net was comparable to the same period in the prior year.
Income Tax Expense
Income tax expense and the effective tax rate were comparable to the same period in the prior year.
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Liquidity and Capital Resources
There have been no material changes in Liquidity and Capital Resources from those reported in Item 7 of our 2022 Annual Report on Form 10-K except as described below.
CASH FLOW ACTIVITIES
The following tables summarize our cash flows for the three months endedMarch 31 , (in thousands): Operating Activities: Three Months Ended March 31, 2023 2022 Variance Cash earnings (net income plus non-cash adjustments)$ 198,280 $ 208,572 $ (10,292 ) Changes in certain operating assets and liabilities: Accounts receivable and other current assets 104,851 (36,246 )
141,097
Accounts payable and accrued liabilities (127,233 ) (8,422 )
(118,811 )
Regulatory assets and liabilities 154,666 98,528 56,138
132,284 53,860 78,424
Other operating activities (1,819 ) 1,689 (3,508 )
Net cash provided by (used in) operating
activities $ 328,745 $ 264,121 $ 64,624 Three Months Ended
Net cash provided by (used in) operating activities was
•
Cash earnings (net income plus non-cash adjustments) were$10 million lower for the three months endedMarch 31, 2023 compared to the same period in the prior year primarily due to higher operating expenses and higher interest expense.
•
Net inflows from changes in certain operating assets and liabilities were
o Cash inflows increased by$141 million as a result of changes in accounts receivable and other current assets primarily driven by higher collections on pass-through revenues and lower natural gas in storage inventories driven by fluctuations in commodity prices and timing of injections and withdrawals; o Cash outflows increased by$119 million as a result of decreases in accounts payable and accrued liabilities primarily driven by fluctuations in commodity prices, payment timing of natural gas and power purchases and changes in other working capital requirements; and o Cash inflows increased by$56 million as a result of changes in our regulatory assets and liabilities primarily due to higher recoveries of deferred gas and fuel cost adjustments driven by fluctuations in commodity prices and higher recoveries of Winter Storm Uri incremental and carrying costs from customers.
•
Cash outflows increased by
Investing Activities:
Three Months Ended March 31,
2023 2022 Variance
Capital expenditures $ (119,105 ) $ (136,779 ) $ 17,674
Other investing activities 17,600 (1,065 ) 18,665
Net cash provided by (used in) investing
activities $ (101,505 ) $ (137,844 ) $ 36,339
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Three Months Ended
Net cash used in investing activities was
•
Cash outflows decreased by
•
Cash inflows increased by
Financing Activities:
Three Months Ended March 31,
2023 2022 Variance
Dividends paid on common stock $ (41,362 ) $ (38,533 ) $ (2,829 )
Common stock issued 27,383 3,791 23,592
Short-term and long-term debt (repayments), net (185,600 ) (78,700 ) (106,900 ) Distributions to non-controlling interests (4,494 ) (4,420 ) (74 ) Other financing activities (5,022 ) (878 ) (4,144 ) Net cash provided by (used in) financing activities$ (209,095 ) $ (118,740 ) $ (90,355 )
Three Months Ended
Net cash used in financing activities was
•
Cash outflows increased
•
Cash inflows increased
•
Cash outflows increased
•
Cash outflows increased by
CAPITAL RESOURCES
Short-term Debt
See Note 5 for information on our Revolving Credit Facility and CP Program.
Covenant Requirements
The Revolving Credit Facility and Wyoming Electric's financing agreements contain covenant requirements. We were in compliance with these covenants as of March 31, 2023. See Note 5 of the Condensed Notes to Consolidated Financial Statements for more information.
Equity
See Note 5 for information on our Equity issuances.
Future Financing Plans
We will continue to assess debt and equity needs to support our capital investment plans and other strategic objectives. We plan to fund our capital plan and strategic objectives by using cash generated from operating activities and various financing alternatives, which could include our Revolving Credit Facility, our CP Program, the issuance of common stock under our ATM program or in an opportunistic block trade. We plan to re-finance a portion of our$525 million , 4.25%, senior unsecured notes dueNovember 30, 2023 , at or before maturity date. We also plan to renew our ATM and shelf registration at or before shelf expiration inAugust 2023 . 34
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Table of Contents CREDIT RATINGS After assessing the current operating performance, liquidity and credit ratings of the Company, management believes that the Company will have access to the capital markets at prevailing market rates for companies with comparable credit ratings.
The following table represents the credit ratings and outlook and risk profile
of BHC at
Rating Agency Senior Unsecured Rating Outlook S&P (a) BBB+ Stable Moody's (b) Baa2 Stable Fitch (c) BBB+ Stable (a) OnFebruary 17, 2023 , S&P reported BBB+ rating and maintained a Stable outlook. (b) OnDecember 20, 2022 , Moody's reported Baa2 rating and maintained a Stable outlook. (c) OnOctober 6, 2022 , Fitch reported BBB+ rating and maintained a Stable outlook.
The following table represents the credit ratings of
Rating Agency Senior Secured Rating S&P (a) A Fitch (b) A (a) OnFebruary 17, 2023 , S&P reported A rating. (b) OnOctober 6, 2022 , Fitch reported A rating.
CAPITAL REQUIREMENTS
Capital Expenditures
Actual Forecasted
Three Months
Capital Expenditures Ended March 31,
by Segment 2023 (a) 2023 (b) 2024 2025 2026 2027
(in millions)
Electric Utilities $ 48 $ 212 $ 348 $ 268 $ 184 $ 163
Gas Utilities 55 386 452 412 393 444
Corporate and Other 1 17 19 20 19 18
Incremental Projects
(c) - - - - 104 75
$ 104 $ 615 $ 819 $ 700 $ 700 $ 700
(a)
Includes accruals for property, plant and equipment as disclosed in supplemental
cash flow information in the Consolidated Statements of Cash Flows in the
Consolidated Financial Statements.
(b)
Includes actual capital expenditures for the three months ended March 31, 2023 .
(c)
These represent projects that are being evaluated by our segments for timing,
cost and other factors.
Dividends
Dividends paid on our common stock totaled $41 million for the three months
ended March 31, 2023 , or $0.625 per share per quarter. On April 24, 2023 , our
board of directors declared a quarterly dividend of $0.625 per share payable
June 1, 2023 , equivalent to an annual dividend of $2.50 per share. The amount of
any future cash dividends to be declared and paid, if any, will depend upon,
among other things, our financial condition, funds from operations, the level of
our capital expenditures, restrictions under our Revolving Credit Facility and
our future business prospects.
Funding Status of Employee Benefit Plans
Based on the fair value of assets and estimated discount rate used to value benefit obligations as ofMarch 31, 2023 , we estimate the unfunded status of our employee benefit plans to be approximately$32 million compared to$35 million atDecember 31, 2022 . We have implemented various de-risking strategies including lump sum buyouts, the purchase of annuities and the reduction of return-seeking assets over time to a more liability-hedged portfolio. As a result, recent capital markets volatility had a limited impact to our funded status and does not require interim re-measurement of our pension plan assets or defined benefit obligations. Critical Accounting Estimates
A summary of our critical accounting estimates is included in our 2022 Annual
Report on Form 10-K. There were no material changes made as of
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New Accounting Pronouncements
Other than the pronouncements reported in our 2022 Annual Report on Form 10-K
and those discussed in Note 1 of the Condensed Notes to Consolidated
Financial Statements, there have been no new accounting pronouncements that are
expected to have a material effect on our financial position, results of
operations or cash flows.
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