Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 001-31303
Black Hills Corporation
Incorporated in South Dakota IRS Identification Number 46-0458824
7001 Mount Rushmore Road
Rapid City, South Dakota 57702
Registrant’s telephone number (605) 721-1700
Former name, former address, and former fiscal year if changed since last report
NONE
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
x
Accelerated Filer
☐
Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock of $1.00 par value
BKH
New York Stock Exchange
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Class
Outstanding at April 28, 2023
Common stock, $1.00 par value
66,660,004
shares
TABLE OF CONTENTS
Page
Glossary of Terms and Abbreviations
3
Forward-Looking Information
6
PART I. FINANCIAL INFORMATION
7
Item 1.
Financial Statements - unaudited
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
8
Consolidated Balance Sheets
9
Consolidated Statements of Cash Flows
11
Consolidated Statements of Equity
12
Condensed Notes to Consolidated Financial Statements
13
Note 1. Management’s Statement
Note 2. Regulatory Matters
14
Note 3. Commitments, Contingencies and Guarantees
15
Note 4. Revenue
Note 5. Financing
16
Note 6. Earnings Per Share
17
Note 7. Risk Management and Derivatives
Note 8. Fair Value Measurements
20
Note 9. Other Comprehensive Income
22
Note 10. Employee Benefit Plans
23
Note 11. Income Taxes
Note 12. Business Segment Information
24
Note 13. Selected Balance Sheet Information
25
Note 14. Subsequent Events
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
Executive Summary
Recent Developments
Results of Operations
Consolidated Summary and Overview
27
Non-GAAP Financial Measure
Electric Utilities
28
Gas Utilities
30
Corporate and Other
31
Consolidated Interest Expense, Other Income and Income Tax Expense
32
Liquidity and Capital Resources
33
Cash Flow Activities
Capital Resources
34
Credit Ratings
35
Capital Requirements
Critical Accounting Estimates
New Accounting Pronouncements
36
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Mine Safety Disclosures
Item 6.
Exhibits
37
Signatures
38
2
GLOSSARY OF TERMS AND ABBREVIATIONS
The following terms and abbreviations appear in the text of this report and have the definitions described below:
AFUDC
Allowance for Funds Used During Construction
AOCI
Accumulated Other Comprehensive Income (Loss)
Arkansas Gas
Black Hills Energy Arkansas, Inc., an indirect, wholly-owned subsidiary of Black Hills Utility Holdings, providing natural gas services to customers in Arkansas (doing business as Black Hills Energy).
ASU
Accounting Standards Update issued by the FASB
ATM
At-the-market equity offering program
Availability
The availability factor of a power plant is the percentage of the time that it is available to provide energy.
BHC
Black Hills Corporation; the Company
Black Hills Colorado IPP
Black Hills Colorado IPP, LLC a 50.1% owned subsidiary of Black Hills Electric Generation
Black Hills Electric Generation
Black Hills Electric Generation, LLC, a direct, wholly-owned subsidiary of Black Hills Non-regulated Holdings, providing wholesale electric capacity and energy primarily to our affiliate utilities.
Black Hills Energy
The name used to conduct the business of our utility companies.
Black Hills Energy Services
Black Hills Energy Services Company, an indirect, wholly-owned subsidiary of Black Hills Utility Holdings, providing natural gas commodity supply for the Choice Gas Programs (doing business as Black Hills Energy)
Black Hills Non-regulated Holdings
Black Hills Non-regulated Holdings, LLC, a direct, wholly-owned subsidiary of Black Hills Corporation
Black Hills Utility Holdings
Black Hills Utility Holdings, Inc., a direct, wholly-owned subsidiary of Black Hills Corporation (doing business as Black Hills Energy)
Black Hills Wyoming
Black Hills Wyoming, LLC, a direct, wholly-owned subsidiary of Black Hills Electric Generation
Blockchain Interruptible Service (BCIS) tariff
The BCIS tariff was proposed by Wyoming Electric and approved by the WPSC in 2019. The tariff was developed to attract new large electric loads related to blockchain and other industry growth with high energy demand.
Cheyenne Light
Cheyenne Light, Fuel and Power Company, a direct, wholly-owned subsidiary of Black Hills Corporation, providing electric service in the Cheyenne, Wyoming area (doing business as Black Hills Energy).
Choice Gas Program
Regulator-approved programs in Wyoming and Nebraska that allow certain utility customers to select their natural gas commodity supplier, providing for the unbundling of the commodity service from the distribution delivery service.
Clean Energy Plan
2030 Ready Plan that establishes a roadmap and preferred resource portfolio for Colorado Electric to cost-effectively achieve the State of Colorado's requirement calling upon electric utilities to reduce GHG emissions by a minimum of 80% by 2030. The preferred resource portfolio calls for the addition of 149 MW of wind, 258 MW of solar and 50 MW of battery storage to Colorado Electric's system. The final mix of resources will be determined by the results of a competitive solicitation starting in 2023. Colorado legislation allows electric utilities to own up to 50% of the renewable generation assets added to comply with the Clean Energy Plan.
Colorado Electric
Black Hills Colorado Electric, LLC, a direct, wholly-owned subsidiary of Black Hills Utility Holdings, providing natural gas services to customers in Colorado (doing business as Black Hills Energy).
Colorado Gas
Black Hills Colorado Gas, Inc., an indirect, wholly-owned subsidiary of Black Hills Utility Holdings, providing natural gas services to customers in Colorado (doing business as Black Hills Energy).
Common Use System
The Common Use System is a jointly operated transmission system we participated in with Basin Electric Power Cooperative and Powder River Energy Corporation. The Common Use System provides transmission service over these utilities' combined 230-kilovolt (kV) and limited 69-kV transmission facilities within areas of southwestern South Dakota and northeastern Wyoming.
Consolidated Indebtedness to Capitalization Ratio
Any indebtedness outstanding at such time, divided by capital at such time. Capital being consolidated net worth (excluding non-controlling interest) plus consolidated indebtedness (including letters of credit and certain guarantees issued) as defined within the current Revolving Credit Facility.
Cooling Degree Day
A cooling degree day is equivalent to each degree that the average of the high and low temperatures for a day is above 65 degrees. The warmer the climate, the greater the number of cooling degree days. Cooling degree days are used in the utility industry to measure the relative warmth and to compare relative temperatures between one geographic area and another. Normal degree days are based on the National Weather Service data for selected locations.
CP Program
Commercial Paper Program
CPUC
Colorado Public Utilities Commission
Dth
Dekatherm. A unit of energy equal to 10 therms or approximately one million British thermal units (MMBtu)
FASB
Financial Accounting Standards Board
Fitch
Fitch Ratings Inc.
GAAP
Accounting principles generally accepted in the United States of America
Heating Degree Day
A heating degree day is equivalent to each degree that the average of the high and the low temperatures for a day is below 65 degrees. The colder the climate, the greater the number of heating degree days. Heating degree days are used in the utility industry to measure the relative coldness and to compare relative temperatures between one geographic area and another. Normal degree days are based on the National Weather Service data for selected locations.
HomeServe
We offer HomeServe products to our natural gas residential customers interested in purchasing additional home repair service plans.
Integrated Generation
Non-regulated power generation and mining businesses that are vertically integrated within our Electric Utilities segment.
Iowa Gas
Black Hills Iowa Gas Utility Company, LLC, a direct, wholly-owned subsidiary of Black Hills Utility Holdings, providing natural gas services to customers in Iowa (doing business as Black Hills Energy).
IPP
Independent Power Producer
IRS
United States Internal Revenue Service
Kansas Gas
Black Hills Kansas Gas Utility Company, LLC, a direct, wholly-owned subsidiary of Black Hills Utility Holdings, providing natural gas services to customers in Kansas (doing business as Black Hills Energy).
kV
Kilovolt
LIBOR
London Interbank Offered Rate
MEAN
Municipal Energy Agency of Nebraska
MMBtu
Million British thermal units
Moody's
Moody's Investors Service, Inc.
MW
Megawatts
MWh
Megawatt-hours
N/A
Not applicable
Nebraska Gas
Black Hills Nebraska Gas, LLC, an indirect, wholly-owned subsidiary of Black Hills Utility Holdings, providing natural gas services to customers in Nebraska (doing business as Black Hills Energy).
NOx
Nitrogen oxide
Northern Iowa Windpower
Northern Iowa Windpower, LLC, a 87.1 MW wind farm located near Joice, Iowa, previously owned by Black Hills Electric Generation. In March 2023, Black Hills Electric Generation completed the sale of Northern Iowa Windpower assets to a third-party.
OCI
Other Comprehensive Income
PPA
Power Purchase Agreement
Pueblo Airport Generation
The 420 MW combined cycle gas-fired power generation plants jointly owned by Colorado Electric (220 MW) and Black Hills Colorado IPP (200 MW). Black Hills Colorado IPP operates this facility. The plants commenced operation on January 1, 2012.
Revolving Credit Facility
Our $750 million credit facility used to fund working capital needs, letters of credit and other corporate purposes, which was amended and restated on July 19, 2021, and now terminates on July 19, 2026.
RMNG
Rocky Mountain Natural Gas LLC, an indirect, wholly-owned subsidiary of Black Hills Utility Holdings, providing natural gas transmission and wholesale services in western Colorado (doing business as Black Hills Energy).
SEC
United States Securities and Exchange Commission
Service Guard Comfort Plan
Appliance protection plan that provides home appliance repair services through on-going monthly service agreements to residential utility customers.
S&P
S&P Global Ratings, a division of S&P Global Inc.
SOFR
Secured Overnight Financing Rate
South Dakota Electric
Black Hills Power, Inc., a direct, wholly-owned subsidiary of Black Hills Corporation, providing electric service to customers in Montana, South Dakota and Wyoming (doing business as Black Hills Energy).
SSIR
System Safety and Integrity Rider
Tech Services
Non-regulated product lines delivered by our Utilities that 1) provide electrical system construction services to large industrial customers of our electric utilities, and 2) serve gas transportation customers throughout its service territory by constructing and maintaining customer-owned gas infrastructure facilities, typically through one-time contracts.
Utilities
Black Hills' Electric and Gas Utilities
4
Wind Capacity Factor
Measures the amount of electricity a wind turbine produces in a given time period relative to its maximum potential.
Winter Storm Uri
February 2021 winter weather event that caused extreme cold temperatures in the central United States and led to unprecedented fluctuations in customer demand and market pricing for natural gas and energy.
WPSC
Wyoming Public Service Commission
Wygen I
A mine-mouth, coal-fired power plant with a total capacity of 90 MW located at our Gillette, Wyoming energy complex. Black Hills Wyoming owns a 76.5% of the facility and Municipal Energy Agency of Nebraska (MEAN) owns the remaining 23.5%.
Wygen II
A mine-mouth, coal-fired power plant owned by Wyoming Electric with a total capacity of 95 MW located at our Gillette, Wyoming energy complex.
Wygen III
A mine-mouth, coal-fired power plant operated by South Dakota Electric with a total capacity of 110 MW located at our Gillette, Wyoming energy complex. South Dakota Electric owns 52% of the power plant, MDU owns 25% and the City of Gillette owns the remaining 23%.
Wyodak Plant
The 362 MW mine-mouth, coal-fired generating facility near Gillette, Wyoming, jointly owned by PacifiCorp (80%) and South Dakota Electric (20%). Our WRDC mine supplies all of the fuel for the facility.
Wyoming Electric
Cheyenne Light, Fuel and Power Company, a direct, wholly-owned subsidiary of Black Hills Corporation, providing electric service to customers in the Cheyenne, Wyoming area (doing business as Black Hills Energy).
Wyoming Gas
Black Hills Wyoming Gas, LLC, an indirect and wholly-owned subsidiary of Black Hills Utility Holdings, providing natural gas services to customers in Wyoming (doing business as Black Hills Energy).
5
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes “forward-looking statements” as defined by the SEC. Forward-looking statements are all statements other than statements of historical fact, including without limitation those statements that are identified by the words “anticipates,” “estimates,” “expects,” “intends,” “plans,” “predicts” and similar expressions, and include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements that are other than statements of historical facts. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions which we believe are reasonable based on current expectations and projections about future events and industry conditions and trends affecting our business. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties that, among other things, could cause actual results to differ materially from those contained in the forward-looking statements, including without limitation, the risk factors described in Item 1A of Part I of our 2022 Annual Report on Form 10-K, Part II, Item 1A of this Quarterly Report on Form 10-Q and other reports that we file with the SEC from time to time, and the following:
New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time-to-time, and it is not possible for us to predict all such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement. We assume no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 1. FINANCIAL STATEMENTS
BLACK HILLS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months EndedMarch 31,
2023
2022
(in thousands, except per share amounts)
Revenue
$
921,159
823,570
Operating expenses:
Fuel, purchased power and cost of natural gas sold
526,267
436,926
Operations and maintenance
140,988
136,132
Depreciation, depletion and amortization
61,643
60,463
Taxes - property and production
17,378
16,696
Total operating expenses
746,276
650,217
Operating income
174,883
173,353
Other income (expense):
Interest expense incurred net of amounts capitalized (including amortization of debt issuance costs, premiums and discounts)
(44,065
)
(38,821
Interest income
561
276
Other income, net
674
704
Total other income (expense)
(42,830
(37,841
Income before income taxes
132,053
135,512
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
Earnings per share of common stock:
Earnings per share, Basic
1.73
1.82
Earnings per share, Diluted
Weighed average common shares outstanding:
Basic
66,036
64,565
Diluted
66,132
64,721
The accompanying Condensed Notes to Consolidated Financial Statements are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Other comprehensive income (loss), net of tax;
Reclassification adjustments of benefit plan liability - prior service cost (net of tax of $0 and $6, respectively)
-
(18
Reclassification adjustments of benefit plan liability - net loss (net of tax of $(16) and $(45), respectively)
143
Derivative instruments designated as cash flow hedges:
Reclassification of net realized (gains) losses on settled/amortized interest rate swaps (net of tax of $(150) and $(177), respectively)
563
536
Net unrealized gains (losses) on commodity derivatives (net of tax of $268 and $(340), respectively)
(855
1,047
Reclassification of net realized (gains) losses on settled commodity derivatives (net of $(466) and $552, respectively)
1,484
(1,702
Other comprehensive income, net of tax
1,220
Comprehensive income
118,600
121,030
Less: comprehensive income attributable to non-controlling interest
Comprehensive income available for common stock
115,304
117,532
See Note 9 for additional disclosures.
CONSOLIDATED BALANCE SHEETS
As of
March 31, 2023
December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents
39,365
21,430
Restricted cash and equivalents
5,765
5,555
Accounts receivable, net
477,089
508,192
Materials, supplies and fuel
129,960
207,421
Derivative assets, current
153
582
Income tax receivable, net
17,772
17,637
Regulatory assets, current
214,838
260,312
Other current assets
33,376
50,579
Total current assets
918,318
1,071,708
Property, plant and equipment
8,466,173
8,374,790
Less: accumulated depreciation and depletion
(1,628,772
(1,576,842
Total property, plant and equipment, net
6,837,401
6,797,948
Other assets:
Goodwill
1,299,454
Intangible assets, net
9,296
9,589
Regulatory assets, non-current
347,031
392,669
Other assets, non-current
48,636
46,862
Total other assets, non-current
1,704,417
1,748,574
TOTAL ASSETS
9,460,136
9,618,230
(Continued)
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
173,221
310,020
Accrued liabilities
228,861
243,457
Derivative liabilities, current
1,729
6,600
Regulatory liabilities, current
110,100
46,013
Notes payable
535,600
Current maturities of long-term debt
525,000
Total current liabilities
1,038,911
1,666,690
Long-term debt, net of current maturities
3,954,409
3,607,340
Deferred credits and other liabilities:
Deferred income tax liabilities, net
535,852
508,941
Regulatory liabilities, non-current
466,961
472,560
Benefit plan liabilities
117,765
116,742
Other deferred credits and other liabilities
154,507
156,062
Total deferred credits and other liabilities
1,275,085
1,254,305
Commitments, contingencies and guarantees (Note 3)
Equity:
Stockholder's equity -
Common stock $1 par value; 100,000,000 shares authorized; issued 66,670,709 and 66,140,396 shares, respectively
66,671
66,140
Additional paid-in capital
1,911,476
1,882,653
Retained earnings
1,136,844
1,064,122
Treasury stock, at cost - 41,114 and 36,726 shares, respectively
(2,697
(2,435
Accumulated other comprehensive income (loss)
(14,347
(15,567
Total stockholders' equity
3,097,947
2,994,913
Non-controlling interest
93,784
94,982
Total equity
3,191,731
3,089,895
TOTAL LIABILITIES AND TOTAL EQUITY
10
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
Operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred financing cost amortization
2,410
2,475
Stock compensation
1,784
3,638
Deferred income taxes
14,858
14,462
Employee benefit plans
3,021
1,173
Other adjustments, net
(2,816
5,337
Changes in certain operating assets and liabilities:
76,122
34,995
Accounts receivable and other current assets
28,729
(71,241
Accounts payable and other current liabilities
(127,233
(8,422
Regulatory assets
154,666
98,528
Other operating activities, net
(1,819
1,689
Net cash provided by operating activities
328,745
264,121
Investing activities:
Property, plant and equipment additions
(119,105
(136,779
Other investing activities
17,600
(1,065
Net cash (used in) investing activities
(101,505
(137,844
Financing activities:
Dividends paid on common stock
(41,362
(38,533
Common stock issued
27,383
3,791
Net borrowings (payments) of Revolving Credit Facility and CP Program
(535,600
(78,700
Long-term debt - issuance
350,000
Distributions to non-controlling interests
(4,494
(4,420
Other financing activities
(5,022
(878
Net cash (used in) financing activities
(209,095
(118,740
Net change in cash, restricted cash and cash equivalents
18,145
7,537
Cash, restricted cash and cash equivalents beginning of period
26,985
13,810
Cash, restricted cash and cash equivalents end of period
45,130
21,347
Supplemental cash flow information:
Cash (paid) refunded during the period:
Interest (net of amounts capitalized)
(27,569
(23,605
Income taxes
49
Non-cash investing and financing activities:
Accrued property, plant and equipment purchases at March 31,
42,102
39,559
CONSOLIDATED STATEMENTS OF EQUITY
Common Stock
Treasury Stock
(in thousands except share amounts)
Shares
Value
Additional Paid in Capital
Retained Earnings
Non-controlling Interest
Total
66,140,396
36,726
3,296
Dividends on common stock ($0.625 per share)
Share-based compensation
84,735
85
4,388
(262
1,886
1,709
Issuance of common stock
445,578
446
27,273
27,719
Issuance costs
(336
Distributions to non-controlling interest
66,670,709
41,114
December 31, 2021
64,793,095
64,793
54,078
(3,509
1,783,436
962,458
(20,084
100,029
2,887,123
3,498
Dividends on common stock ($0.595 per share)
425
(34,393
2,222
(191
2,031
55,707
56
3,776
3,832
(41
March 31, 2022
64,849,227
64,849
19,685
(1,287
1,786,980
1,041,451
(20,078
99,107
2,971,022
(Reference is made to Notes to Consolidated Financial Statements
included in the Company’s 2022 Annual Report on Form 10-K)
The unaudited Consolidated Financial Statements included herein have been prepared by Black Hills Corporation (together with our subsidiaries the “Company”, “us”, “we” or “our”), pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however, we believe that the footnotes adequately disclose the information presented. These Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and the notes included in our 2022 Annual Report on Form 10-K.
Use of Estimates and Basis of Presentation
The information furnished in the accompanying Consolidated Financial Statements reflects certain estimates required and all adjustments, including accruals, which are, in the opinion of management, necessary for a fair presentation of the March 31, 2023, December 31, 2022 and March 31, 2022 financial information. Certain lines of business in which we operate are highly seasonal, and our interim results of operations are not necessarily indicative of the results of operations to be expected for an entire year.
Recently Issued Accounting Standards
Facilitation of the Effects of Reference Rate Reform on Financial Reporting, ASU 2020-04
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which was subsequently amended by ASU 2021-01 and ASU 2022-06. The standard provides relief for companies preparing for discontinuation of interest rates, such as LIBOR, and allows optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are elective and are effective upon the ASU issuance through December 31, 2024. We are currently evaluating if we will apply the optional guidance as we assess the impact of the discontinuance of LIBOR on our current arrangements. We do not expect the ASU to have a material impact on our financial position, results of operations and cash flows.
We had the following regulatory assets and liabilities (in thousands):
Winter Storm Uri (a)
253,835
347,980
Deferred energy and fuel cost adjustments (b)
79,020
72,580
Deferred gas cost adjustments (b)
16,047
12,147
Gas price derivatives (b)
8,793
Deferred taxes on AFUDC (b)
7,482
7,333
Employee benefit plans and related deferred taxes (c)
88,710
89,259
Environmental (b)
1,341
1,343
Loss on reacquired debt (b)
18,764
19,213
Deferred taxes on flow through accounting (b)
74,022
69,529
Decommissioning costs (b)
2,850
3,472
Other regulatory assets (b)
19,798
21,332
Total regulatory assets
561,869
652,981
Less current regulatory assets
(214,838
(260,312
Regulatory liabilities
Deferred energy and gas costs (b)
106,030
41,722
Employee benefit plan costs and related deferred taxes (c)
33,839
34,258
Cost of removal (b)
177,453
175,614
Excess deferred income taxes (c)
248,126
254,833
Other regulatory liabilities (c)
11,613
12,146
Total regulatory liabilities
577,061
518,573
Less current regulatory liabilities
(110,100
(46,013
Regulatory Activity
Except as discussed below, there have been no other significant changes to our Regulatory Matters from those previously disclosed in Note 2 of the Notes to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K.
On April 7, 2023, RMNG filed a settlement agreement with the CPUC for its rate review filed on October 7, 2022. The agreement is expected to generate $8.2 million in new annual revenue and establishes a weighted average cost of capital of 6.93% with a capital structure that reflects an equity range of 50% to 52%, a debt range of 50% to 48% and a return on equity range of 9.5% to 9.7%. The settlement also shifts $8.3 million of SSIR revenues to base rates and terminates the SSIR. The agreement is awaiting a decision by an administrative law judge, with new rates expected in the third quarter of 2023.
On June 1, 2022, Wyoming Electric filed a rate review with the WPSC seeking recovery of significant infrastructure investments in its 1330-mile electric distribution and 59-mile electric transmission systems. On January 26, 2023, the WPSC approved a settlement agreement with intervening parties for a general rate increase. The settlement is expected to generate $8.7 million in new annual revenue with a capital structure of 52% equity and 48% debt and a return on equity of 9.75%. New rates were effective March 1, 2023. The agreement also includes approval of a new rider that will be filed annually to recover transmission investment and expenses.
There have been no significant changes to commitments, contingencies and guarantees from those previously disclosed in Note 3 of our Notes to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K.
The following tables depict the disaggregation of revenue, including intercompany revenue, from contracts with customers by customer type and timing of revenue recognition for each of the reportable segments for the three months ended March 31, 2023 and 2022. Sales tax and other similar taxes are excluded from revenues.
Three Months Ended March 31, 2023
Inter-company Revenues
Customer types:
Retail
174,903
635,545
810,448
Transportation
52,843
(115
52,728
Wholesale
9,398
Market - off-system sales
16,124
281
16,405
Transmission/Other
17,404
10,023
(4,351
23,076
Revenue from contracts with customers
217,829
698,692
(4,466
912,055
Other revenues
880
8,224
9,104
Total revenues
218,709
706,916
Timing of revenue recognition:
Services transferred at a point in time
8,657
Services transferred over time
209,172
903,398
Three Months Ended March 31, 2022
172,806
561,013
733,819
49,523
(99
49,424
10,275
7,154
238
7,392
15,433
9,575
(4,149
20,859
205,668
620,349
(4,248
821,769
870
1,043
(112
1,801
206,538
621,392
(4,360
7,113
198,555
814,656
Short-term Debt
Revolving Credit Facility and CP Program
Our Revolving Credit Facility and CP Program, which are classified as Notes payable on the Consolidated Balance Sheets, had the following borrowings, outstanding letters of credit, and available capacity (dollars in thousands):
Amount outstanding
—
Letters of credit (a)
2,401
24,626
Available capacity
747,599
189,774
Weighted average interest rates
4.88
%
Revolving Credit Facility and CP Program borrowing activity was as follows (dollars in thousands):
Maximum amount outstanding (based on daily outstanding balances)
548,700
429,000
Average amount outstanding (based on daily outstanding balances)
331,268
360,823
4.91
0.44
Long-term Debt
On March 7, 2023, we completed a public debt offering of $350 million, 5.95% five year senior unsecured notes due March 15, 2028. The proceeds from the offering, which were net of $4.2 million of deferred financing costs, were used to repay notes outstanding under our CP Program and for other general corporate purposes.
Debt Covenants
Under our Revolving Credit Facility, we are required to maintain a Consolidated Indebtedness to Capitalization Ratio not to exceed 0.65 to 1.00. Subject to applicable cure periods, a violation of any of these covenants would constitute an event of default that entitles the lenders to terminate their remaining commitments and accelerate all principal and interest outstanding.
We were in compliance with our covenants at March 31, 2023, as shown below:
As of March 31, 2023
Covenant Requirement
59.1%
Less than 65%
Covenants within Wyoming Electric's financing agreements require Wyoming Electric to maintain a debt to capitalization ratio of no more than 0.60 to 1.00. As of March 31, 2023, we were in compliance with these financial covenants.
Equity
At-the-Market Equity Offering Program
ATM activity was as follows (net proceeds and issuance costs in millions):
Proceeds, (net of issuance costs of $(0.3), $(0.0) respectively)
27.4
3.8
Average price per share
62.21
68.79
Number of shares issued
As of March 31, 2023, there were 34,040 shares issued, but not settled.
A reconciliation of share amounts used to compute earnings per share in the accompanying Consolidated Statements of Income was as follows (in thousands, except per share amounts):
Weighted average shares - basic
Dilutive effect of:
Equity compensation
96
156
Weighted average shares - diluted
The following securities were excluded from the diluted earnings per share computation because of their anti-dilutive nature (in thousands):
53
Anti-dilutive shares
Market and Credit Risk Disclosures
Our activities in the energy industry expose us to a number of risks in the normal operations of our businesses. Depending on the activity, we are exposed to varying degrees of market risk and credit risk. Valuation methodologies for our derivatives are detailed within Note 1 of the Notes to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K.
Market Risk
Market risk is the potential loss that may occur as a result of an adverse change in market price, rate or supply. We are exposed but not limited to, the following market risks:
Credit Risk
Credit risk is the risk of financial loss resulting from non-performance of contractual obligations by a counterparty.
We attempt to mitigate our credit exposure by conducting business primarily with high credit quality entities, setting tenor and credit limits commensurate with counterparty financial strength, obtaining master netting agreements and mitigating credit exposure with less creditworthy counterparties through parental guarantees, cash collateral requirements, letters of credit and other security agreements.
We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customers’ current creditworthiness, as determined by review of their current credit information. We maintain a provision for estimated credit losses based upon historical experience, changes in current market conditions, expected losses and any specific customer collection issue that is identified.
Derivatives and Hedging Activity
Our derivative and hedging activities included in the accompanying Consolidated Balance Sheets, Consolidated Statements of Income and Consolidated Statements of Comprehensive Income are detailed below and in Note 8.
The operations of our Utilities, including natural gas sold by our Gas Utilities and natural gas used by our Electric Utilities’ generation plants or those plants under PPAs where our Electric Utilities must provide the generation fuel (tolling agreements), expose our utility customers to natural gas price volatility. Therefore, as allowed or required by state utility commissions, we enter into commission approved hedging programs utilizing natural gas futures, options, over-the-counter swaps and basis swaps to reduce our customers’ underlying exposure to these fluctuations. These transactions are considered derivatives, and in accordance with accounting standards for derivatives and hedging, mark-to-market adjustments are recorded as Derivative assets or Derivative liabilities on the accompanying Consolidated Balance Sheets, net of balance sheet offsetting as permitted by GAAP.
For our regulated Utilities’ hedging plans, unrealized and realized gains and losses, as well as option premiums and commissions on these transactions, are recorded as Regulatory assets or Regulatory liabilities in the accompanying Consolidated Balance Sheets in accordance with the state regulatory commission guidelines. When the related costs are recovered through our rates, the hedging activity is recognized in the Consolidated Statements of Income.
We use wholesale power purchase and sale contracts to manage purchased power costs and load requirements associated with serving our electric customers. Periodically, certain wholesale energy contracts are considered derivative instruments due to not qualifying for the normal purchase and normal sales exception to derivative accounting. Changes in the fair value of these commodity derivatives are recognized in the Consolidated Statements of Income.
To support our Choice Gas Program customers, we buy, sell and deliver natural gas at competitive prices by managing commodity price risk. As a result of these activities, this area of our business is exposed to risks associated with changes in the market price of natural gas. We manage our exposure to such risks using over-the-counter and exchange traded options and swaps with counterparties in anticipation of forecasted purchases and sales during time frames ranging from April 2023 through October 2025. A portion of our over-the-counter swaps have been designated as cash flow hedges to mitigate the commodity price risk associated with deliveries under fixed price forward contracts to deliver gas to our Choice Gas Program customers. The gain or loss on these designated derivatives is reported in AOCI in the accompanying Consolidated Balance Sheets and reclassified into earnings in the same period that the underlying hedged item is recognized in earnings. Effectiveness of our hedging position is evaluated at least quarterly.
The contract or notional amounts and terms of the electric and natural gas derivative commodity instruments held at our Utilities are composed of both long and short positions. We had the following net long positions as of:
Notional Amounts (MMBtus)
Maximum Term (months) (a)
Natural gas futures purchased
630,000
Natural gas options purchased, net
1,790,000
Natural gas basis swaps purchased
900,000
Natural gas over-the-counter swaps, net (b)
3,270,000
4,460,000
Natural gas physical contracts, net (c)
3,881,190
17,864,412
18
We have certain derivative contracts which contain credit provisions. These credit provisions may require the Company to post collateral when credit exposure to the Company is in excess of a negotiated line of unsecured credit. At March 31, 2023, the Company posted $0.6 million related to such provisions, which is included in Other current assets on the Consolidated Balance Sheets.
Derivatives by Balance Sheet Classification
As required by accounting standards for derivatives and hedges, fair values within the following tables are presented on a gross basis aside from the netting of asset and liability positions. Netting of positions is permitted in accordance with accounting standards for offsetting and under terms of our master netting agreements that allow us to settle positive and negative positions.
The following table presents the fair value and balance sheet classification of our derivative instruments (in thousands) as of:
Balance Sheet Location
March 31,2023
December 31,2022
Derivatives designated as hedges:
Asset derivative instruments:
Current commodity derivatives
118
Noncurrent commodity derivatives
198
Liability derivative instruments:
(543
(1,703
(2
Total derivatives designated as hedges
(545
(1,387
Derivatives not designated as hedges:
464
111
337
(1,186
(4,897
(20
Total derivatives not designated as hedges
(942
(4,114
Derivatives Designated as Hedge Instruments
The impacts of cash flow hedges on our Consolidated Statements of Comprehensive Income and Consolidated Statements of Income are presented below for the three months ended March 31, 2023 and 2022. Note that this presentation does not reflect the gains or losses arising from the underlying physical transactions; therefore, it is not indicative of the economic profit or loss we realized when the underlying physical and financial transactions were settled.
Derivatives in Cash Flow Hedging Relationships
Amount of Gain/(Loss) Recognized in OCI
Location on the Consolidated Statements of Income
Amount of Gain/(Loss) Reclassified from AOCI into Income
Interest rate swaps
713
Interest expense
(713
Commodity derivatives
827
(867
(1,950
2,254
1,540
(154
(2,663
1,541
As of March 31, 2023, $3.6 million of net losses related to our interest rate swaps and commodity derivatives are expected to be reclassified from AOCI into earnings within the next 12 months. As market prices fluctuate, estimated and actual realized gains or losses will change during future periods.
19
Derivatives Not Designated as Hedge Instruments
The following table summarizes the impacts of derivative instruments not designated as hedge instruments on our Consolidated Statements of Income for the three months ended March 31, 2023 and 2022. Note that this presentation does not reflect the expected gains or losses arising from the underlying physical transactions; therefore, it is not indicative of the economic profit or loss we realized when the underlying physical and financial transactions were settled.
Derivatives Not Designated as Hedging Instruments
Location of Gain/(Loss) on Derivatives Recognized in Income
Amount of Gain/(Loss) on Derivatives Recognized in Income
Commodity derivatives - Natural Gas
(3,094
3,494
As discussed above, financial instruments used in our regulated Gas Utilities are not designated as cash flow hedges. However, there is no earnings impact because the unrealized gains and losses arising from the use of these financial instruments are recorded as Regulatory assets or Regulatory liabilities. The net unrealized gains included in our Regulatory liability accounts related to these financial instruments in our Gas Utilities were $0.1 million as of March 31, 2023. The net unrealized losses included in our Regulatory asset accounts related to these financial instruments were $8.8 million as of December 31, 2022. For our Electric Utilities, the unrealized gains and losses arising from these derivatives are recognized in the Consolidated Statements of Income.
We use the following fair value hierarchy for determining inputs for our financial instruments. Our assets and liabilities for financial instruments are classified and disclosed in one of the following fair value categories:
Level 1 — Unadjusted quoted prices available in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities. Level 1 instruments primarily consist of highly liquid and actively traded financial instruments with quoted pricing information on an ongoing basis.
Level 2 — Pricing inputs include quoted prices for identical or similar assets and liabilities in active markets other than quoted prices in Level 1, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 — Pricing inputs are generally less observable from objective sources. These inputs reflect management’s best estimate of fair value using its own assumptions about the assumptions a market participant would use in pricing the asset or liability.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy levels. We record transfers, if necessary, between levels at the end of the reporting period for all of our financial instruments.
Transfers into Level 3, if any, occur when significant inputs used to value the derivative instruments become less observable, such as a significant decrease in the frequency and volume in which the instrument is traded, negatively impacting the availability of observable pricing inputs. Transfers out of Level 3, if any, occur when the significant inputs become more observable, such as when the time between the valuation date and the delivery date of a transaction becomes shorter, positively impacting the availability of observable pricing inputs.
Recurring Fair Value Measurements
Derivatives
The commodity contracts for our Utilities segments are valued using the market approach and include forward strip pricing at liquid delivery points, exchange-traded futures, options, basis swaps and over-the-counter swaps and options (Level 2) for wholesale electric energy and natural gas contracts. For exchange-traded futures, options and basis swap assets and liabilities, fair value was derived using broker quotes validated by the exchange settlement pricing for the applicable contract. For over-the-counter instruments, the fair value is obtained by utilizing a nationally recognized service that obtains observable inputs to compute the fair value, which we validate by comparing our valuation with the counterparty. The fair value of these swaps includes a credit valuation adjustment based on the credit spreads of the counterparties when we are in an unrealized gain position or on our own credit spread when we are in an unrealized loss position. For additional information, see Note 1 of our Notes to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K.
The following tables set forth, by level within the fair value hierarchy, our gross assets and gross liabilities and related offsetting of cash collateral and contractual netting rights as permitted by GAAP that were accounted for at fair value on a recurring basis for derivative instruments.
Level 1
Level 2
Level 3
Cash Collateral and Counterparty Netting (a)
Assets:
Commodity derivatives - Gas Utilities
264
Liabilities:
1,751
As of December 31, 2022
5,407
(4,290
1,117
11,455
(4,837
6,618
Pension and Postretirement Plan Assets
Fair value measurements also apply to the valuation of our pension and postretirement plan assets. Current accounting guidance requires employers to annually disclose information about the fair value measurements of their assets of a defined benefit pension or other postretirement plan. The fair value of these assets is presented in Note 13 to the Consolidated Financial Statements included in our 2022 Annual Report on Form 10-K.
Other Fair Value Measures
The carrying amount of cash and cash equivalents, restricted cash and equivalents and short-term borrowings approximates fair value due to their liquid or short-term nature. Cash, cash equivalents and restricted cash are classified in Level 1 in the fair value hierarchy. Notes payable consist of commercial paper borrowings and are not traded on an exchange; therefore, they are classified as Level 2 in the fair value hierarchy.
The following table presents the carrying amounts and fair values of financial instruments not recorded at fair value on the Consolidated Balance Sheets (in thousands) as of:
Carrying Amount
Fair Value
Long-term debt, including current maturities (a)
4,479,409
4,205,369
4,132,340
3,760,848
21
We record deferred gains (losses) in AOCI related to interest rate swaps designated as cash flow hedges, commodity contracts designated as cash flow hedges and the amortization of components of our defined benefit plans. Deferred gains (losses) for our commodity contracts designated as cash flow hedges are recognized in earnings upon settlement, while deferred gains (losses) related to our interest rate swaps are recognized in earnings as they are amortized.
The following table details reclassifications out of AOCI and into Net income. The amounts in parentheses below indicate decreases to Net income in the Consolidated Statements of Income for the period, net of tax (in thousands):
Amount Reclassified from AOCI
Gains and (losses) on cash flow hedges:
Commodity contracts
Income tax
Income tax expense
616
(375
Total reclassification adjustments related to cash flow hedges, net of tax
(2,047
1,166
Amortization of components of defined benefit plans:
Prior service cost
Actuarial gain (loss)
(44
(188
(164
39
Total reclassification adjustments related to defined benefit plans, net of tax
(28
(125
Total reclassifications
(2,075
1,041
Balances by classification included within AOCI, net of tax on the accompanying Consolidated Balance Sheets were as follows (in thousands):
Derivatives Designated as Cash Flow Hedges
Interest Rate Swaps
Commodity Derivatives
Employee Benefit Plans
(8,255
(1,200
(6,112
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from AOCI
2,075
(7,692
(571
(6,084
As of December 31, 2021
(10,384
1,476
(11,176
125
(1,041
As of March 31, 2022
(9,848
821
(11,051
Components of Net Periodic Expense
The components of net periodic expense were as follows (in thousands):
Defined Benefit Pension Plan
Supplemental Non-qualified Defined Benefit Plans
Non-pension Defined Benefit Postretirement Healthcare Plan
Service cost
614
982
914
(392
381
492
Interest cost
4,381
2,705
369
208
594
321
Expected return on plan assets
(4,672
(4,631
(56
(31
Net amortization of prior service costs
(17
(72
Recognized net actuarial loss (gain)
498
1,523
69
(3
Net periodic expense (benefit)
804
562
1,291
926
726
Plan Contributions
Contributions to the Defined Benefit Pension Plan are cash contributions made directly to the Pension Plan Trust account. Contributions to the Postretirement Healthcare and Supplemental Plans are made in the form of benefit payments. Contributions made in the first three months of 2023 and anticipated contributions for 2023 and 2024 are as follows (in thousands):
Contributions Made
Additional Contributions
Contributions
Anticipated for 2023
Anticipated for 2024
1,230
3,690
4,556
Supplemental Non-qualified Defined Benefit and Defined Contribution Plans
558
1,673
IRS Revenue Procedure 2023-15
On April 14, 2023, the IRS released Revenue Procedure 2023-15 “Amounts paid to improve tangible property.” The Revenue Procedure provides a safe harbor method of accounting that taxpayers may use to determine whether expenses to repair, maintain, replace, or improve natural gas transmission and distribution property must be capitalized. We are currently assessing the Revenue Procedure to determine its impact on our tax repairs deduction.
Income Tax Expense and Effective Tax Rates
Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022
Income tax expense for the three months ended March 31, 2023 was $14.7 million compared to $14.5 million reported for the same period in 2022. For the three months ended March 31, 2023, the effective tax rate was 11.1% which was comparable to 10.7% for the same period in 2022.
Segment information was as follows (in thousands):
Total assets (net of intercompany eliminations) as of:
3,922,496
3,929,721
5,419,216
5,578,282
118,424
110,227
Total assets
External Operating Revenue
Inter-company Operating Revenue
Contract Customers
Other Revenues
Total Revenues
Segment:
215,012
881
2,816
697,043
8,223
1,650
Inter-company eliminations
202,739
2,929
619,030
931
1,319
112
Operating income (loss):
61,060
50,746
114,625
123,540
(802
(933
Interest expense, net
(43,504
(38,545
Accounts Receivable and Allowance for Credit Losses
Following is a summary of Accounts receivable, net included in the accompanying Consolidated Balance Sheets (in thousands) as of:
Billed Accounts Receivable
327,949
267,571
Unbilled Revenue
154,571
243,574
Less: Allowance for Credit Losses
(5,431
(2,953
Account Receivable, net
Changes to allowance for credit losses for the three months ended March 31, 2023 and 2022, respectively, were as follows (in thousands):
Balance at Beginning of Year
Additions Charged to Costs and Expenses
Recoveries and Other Additions
Write-offs and Other Deductions
Balance at March 31,
2,953
3,703
641
(1,866
5,431
2,113
3,416
655
(1,698
4,486
Materials, Supplies and Fuel
The following amounts by major classification are included in Materials, supplies and fuel on the accompanying Consolidated Balance Sheets (in thousands) as of:
Materials and supplies
102,328
99,734
Fuel - Electric Utilities
6,808
3,115
Natural gas in storage
20,824
104,572
Total materials, supplies and fuel
Accrued Liabilities
The following amounts by major classification are included in Accrued liabilities on the accompanying Consolidated Balance Sheets (in thousands) as of:
Accrued employee compensation, benefits and withholdings
48,555
62,890
Accrued property taxes
54,694
52,430
Customer deposits and prepayments
42,124
47,655
Accrued interest
47,928
33,798
Other (none of which is individually significant)
35,560
46,684
Total accrued liabilities
Except as described in Notes 2 and 11, there have been no events subsequent to March 31, 2023, which would require recognition in the consolidated financial statements or disclosures.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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: Electric Utilities and Gas Utilities. Certain unallocated corporate expenses that support our operating segments are presented as Corporate and Other. We conduct our utility operations under the name Black Hills Energy predominantly in rural areas of the Rocky Mountains and Midwestern states. We consider ourself a domestic electric and natural gas utility company.
We have provided energy and served customers for 139 years, since the 1883 gold rush days in Deadwood, 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.
Business Segment Recent Developments
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 our Electric Utilities is June through August while the normal peak usage season for our Gas Utilities is November through March. Significant earnings variances can be expected between the Gas Utilities segment’s peak and off-peak seasons. Due to this seasonal nature, our results of operations for the three months ended March 31, 2023 and 2022, and our financial condition as of March 31, 2023 and December 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.
Total earnings per share of common stock, Diluted
Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022:
The variance to the prior year included the following:
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.
Operating results for the Electric Utilities were as follows (in thousands):
Variance
Revenue:
Electric - regulated
206,702
195,725
10,977
Other - non-regulated
12,007
10,813
1,194
Total revenue
12,171
Cost of fuel and purchased power:
54,650
51,479
3,171
766
(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
67,154
69,669
(2,515
Depreciation and amortization
35,079
33,713
1,366
102,233
103,382
(1,149
10,314
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
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.
Operating Statistics
Revenue (in thousands)
Quantities Sold (MWh)
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
256,856
160,441
Other (a)
20,089
16,063
Total Regulated
1,798,015
1,723,721
Non-Regulated (b)
54,346
89,094
Total Revenue and Quantities Sold
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
73,795
75,445
604,543
619,588
86,614
78,597
708,821
644,223
46,671
42,089
484,651
459,910
11,629
10,407
Quantities Generated and Purchased by Fuel Type (MWh)
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
94,113
124,513
Total Purchased
583,929
712,673
Total Generated and Purchased
Quantities Generated and Purchased (MWh)
160,201
85,431
564,044
455,605
230,562
204,598
451,930
467,794
197,624
300,397
156,972
197,063
209,793
190,805
19,540
24,408
29
Degree Days
Actual
Variance from Normal
Heating Degree Days:
2,751
8%
2,715
3,446
5%
3,248
(1)%
3,301
10%
3,132
4%
Combined (a)
3,099
7%
2,981
Contracted generating facilities Availability by fuel type (a)
92.7%
90.6%
Natural gas and diesel oil
94.3%
95.3%
92.5%
95.6%
Total Availability
93.6%
94.1%
48.1%
42.0%
Operating results for the Gas Utilities were as follows (in thousands):
Natural gas - regulated
674,773
596,458
78,315
32,143
24,934
7,209
85,524
Cost of natural gas sold:
454,107
383,712
70,395
16,859
1,015
15,844
Total cost of natural gas sold
470,966
384,727
86,239
Gas Utility margin (non-GAAP)
235,950
236,665
(715
94,827
86,441
8,386
26,498
26,684
(186
121,325
113,125
8,200
(8,915
Gas Utility margin decreased as a result of the following:
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
(0.9
(0.7
Operations and maintenance expense increased primarily due to $6.3 million of higher employee-related expenses and $1.7 million of higher materials and outside services expenses.
Depreciation and amortization was comparable to the same period in the prior year.
Quantities Sold and Transported (Dth)
428,576
376,044
29,935,584
31,814,250
182,523
158,642
14,004,072
14,631,703
9,199
9,238
1,038,433
1,164,583
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
92,157,629
92,655,739
Non-regulated Services (a)
126,637
127,809
11,475,750
12,927,736
144,886
120,053
14,055,294
13,418,684
125,457
120,579
14,291,408
15,376,182
72,221
58,851
11,173,502
10,989,067
164,950
134,234
27,080,790
27,335,774
72,765
59,866
14,080,885
12,608,296
Heating Degree Days
Arkansas Gas (a)
1,666
(18)%
2,099
---%
3,087
2,946
1%
3,247
(6)%
3,579
6%
Kansas Gas (a)
2,373
(4)%
2,584
3,054
3,041
3,624
21%
3,272
3%
Combined (b)
3,196
3,165
2%
Corporate and Other operating results were as follows (in thousands):
Operating (loss)
131
Operating loss was comparable to the same period in the prior year.
(4,959
Other income (expense), net
(30
(185
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.
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 ended March 31, (in thousands):
Operating Activities:
Cash earnings (net income plus non-cash adjustments)
198,280
208,572
(10,292
104,851
(36,246
141,097
Accounts payable and accrued liabilities
(118,811
Regulatory assets and liabilities
56,138
132,284
53,860
78,424
Other operating activities
(3,508
Net cash provided by (used in) operating activities
64,624
Net cash provided by (used in) operating activities was $65 million higher than the same period in 2022. The variance to the prior year was primarily attributable to:
Investing Activities:
Capital expenditures
17,674
18,665
Net cash provided by (used in) investing activities
36,339
Net cash used in investing activities was $36 million lower than the same period in 2022. The variance to the prior year was primarily attributable to:
Financing Activities:
(2,829
23,592
Short-term and long-term debt (repayments), net
(185,600
(106,900
(74
(4,144
Net cash provided by (used in) financing activities
(90,355
Net cash used in financing activities was $90 million higher than the same period in 2022. The variance to the prior year was primarily attributable to:
CAPITAL RESOURCES
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.
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 due November 30, 2023, at or before maturity date. We also plan to renew our ATM and shelf registration at or before shelf expiration in August 2023.
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 March 31, 2023:
Rating Agency
Senior Unsecured Rating
Outlook
S&P (a)
BBB+
Stable
Moody's (b)
Baa2
Fitch (c)
The following table represents the credit ratings of South Dakota Electric at March 31, 2023:
Senior Secured Rating
A
Fitch (b)
CAPITAL REQUIREMENTS
Capital Expenditures
Forecasted
Capital Expenditures by Segment
Three Months Ended March 31, 2023 (a)
2023 (b)
2024
2025
2026
2027
48
212
348
268
184
163
55
386
452
412
393
444
1
Incremental Projects (c)
104
75
615
819
700
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 of March 31, 2023, we estimate the unfunded status of our employee benefit plans to be approximately $32 million compared to $35 million at December 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.
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 March 31, 2023.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our quantitative and qualitative disclosures about market risk previously disclosed in Item 7A of our 2022 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2023. Based on their evaluation, they have concluded that our disclosure controls and procedures were effective at March 31, 2023.
Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2023, there have been no changes in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
For information regarding legal proceedings, see Note 3 in Item 8 of our 2022 Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
There are no material changes to the risk factors previously disclosed in Item 1A of Part I in our 2022 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table contains monthly information about our acquisitions of equity securities for the three months ended March 31, 2023:
Period
Total Number of Shares Purchased (a)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs
January 1, 2023 - January 31, 2023
70.33
February 1, 2023 - February 28, 2023
12,235
64.14
March 1, 2023 - March 31, 2023
61.15
12,238
ITEM 4. MINE SAFETY DISCLOSURES
Information concerning mine safety violations or other regulatory matters required by Sections 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act is included in Exhibit 95.
ITEM 6. EXHIBITS
Exhibits filed herewithin are designated by an asterisk (*). All exhibits not so designated are incorporated by reference to a prior filing, as indicated. Items constituting a board of director or management compensatory plan are designated by a cross (†).
Exhibit Number
Description
4.1
Eleventh Supplemental Indenture dated as of March 7, 2023 (filed as Exhibit 4.1 to the Registrant's Form 8-K filed on March 7, 2023).
10.1*†
Letter Agreement between Black Hills Corporation and Jennifer C. Landis
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
32.1*
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
32.2*
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
95*
Mine Safety and Health Administration Safety Data.
101.INS*
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
104*
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Linden R. Evans
Linden R. Evans, President and
Chief Executive Officer
/s/ Kimberly F. Nooney
Kimberly F. Nooney, Senior Vice President and
Chief Financial Officer
Dated:
May 4, 2023