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 our 2021 Form 10-K.
Executive Summary
Black Hills Corporation (together with its subsidiaries, referred to herein as
the "Company," "we," "us" or "our") is a customer-focused energy solutions
provider that invests in its communities' safety, sustainability and growth with
a mission of Improving Life with Energy and a vision to be the Energy Partner of
Choice. The Company's core mission- and our primary focus - is to provide safe,
reliable and cost-effective electric and natural gas service to 1.3 million
utility customers in over 800 communities in eight states, including Arkansas ,
Colorado , Iowa , Kansas , Montana , Nebraska , South Dakota and Wyoming .
Recent Developments
Winter Storm Uri
In February 2021 , Winter Storm Uri caused a substantial increase in heating and
energy demand and contributed to unforeseeable and unprecedented market prices
for natural gas and electricity. As a result, we incurred significant
incremental fuel, purchased power and natural gas costs.
In 2021, our Utilities submitted cost recovery applications with the utility
commissions in our state jurisdictions to recover incremental costs associated
with Winter Storm Uri. We have received final commission approval for all of our
Winter Storm Uri cost recovery applications, which will allow full recovery of
our incremental fuel, purchased power and natural gas costs. See Note 2 of
the Notes to Condensed Consolidated Financial Statements for further
information.
Macroeconomic Trends
We are monitoring macroeconomic trends including inflationary pressures on the
prices of commodities, materials, outside services and employee costs; supply
chain constraints; rising interest rates and a competitive and tight labor
market. To date, we have experienced moderate net impacts from these trends.
Higher commodity energy costs continue to have an effect on customer bills. Our
utilities have regulatory mechanisms that allow them to pass prudently incurred
costs of energy through to the customer, which mitigates our exposure. Customer
billing rates are adjusted periodically to reflect changes in our cost of
energy. As a result of increased customer billings, we incurred higher bad debt
expense.
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-------------------------------------------------------------------------------- Table of Contents We are proactively managing increased costs of materials and supply chain disruptions to achieve our forecasted capital investment targets. We have contracted a significant majority of the materials needed to complete our 2022 capital program. We have also evaluated each of our forecasted projects and will prioritize depending on future constraints. Project delays may occur if costs rise significantly or if materials are not available. Inflationary pressures and supply chain constraints have increased our operating expenses, which included higher outside services expenses (i.e. consulting and contractor rates), materials expenses and vehicle expenses driven by higher fuel prices. Rising interest rates have increased interest expense on our variable rate borrowings, which include our Revolving Credit Facility and CP Program. However, the increased interest expense was limited since 89% of our debt atSeptember 30, 2022 is fixed rate debt. Rising discount rates and recent capital markets volatility had a limited impact to our unfunded status of the BHC Pension Plan from the prior year. We are faced with increased competition for employee and contractor talent in the current labor market. To date, we have seen lower total employee costs due to workforce attrition partially offset by increased employee and contractor costs related to attraction and retention of talent.
More detailed discussion of the future uncertainties can be found in "Risk Factors" section in Part I, Item 1A of our 2021 Annual Report on Form 10-K.
Sustainability Goals Updated
OnAugust 31, 2022 , we published our 2021 Sustainability Report highlighting our environmental, social and governance achievements and strategies to further decarbonize our Utilities' systems. The report highlights our progress toward reducing greenhouse gas emissions intensity by one-third off a 2005 baseline. In addition, we announced a new Net Zero by 2035 target for ourGas Utilities , which doubles the previous target of a 50% reduction by 2035. Net Zero will be achieved through pipeline material and main replacements, advanced leak detection, third-party damage reduction, expanding the use of RNG and hydrogen and utilizing carbon credit offsets.
Environmental Matters - Good Neighbor Rule
InMarch 2022 , the EPA released its Good Neighbor Rule, which contains proposed revisions to the Cross-State Air Pollution Rule (CSAPR) framework and is intended to address ozone transport for the 2015 ozoneNational Ambient Air Quality Standards (NAAQS). The rule focuses on reductions of NOx, precursors to ozone formation and covers 26 states, includingWyoming for the first time. The EPA proposes to retain emissions allowance trading for generating facilities. Beginning in 2023, emissions budgets would be set at the level of reductions achievable through immediately available measures such as consistently operating existing emissions controls. Starting in 2026, emissions budgets would be set at levels achievable by the installation of Selective Catalytic Reactor controls at certain generating facilities. The EPA accepted comments on the proposal throughJune 21, 2022 . We anticipate that any costs incurred as a result of the proposed rule would be recoverable through our regulatory mechanisms.
Inflation Reduction Act
The "Inflation Reduction Act" ("IRA"), signed into law by President Biden on
August 16, 2022 , features $370 billion in spending and tax incentives on clean
energy provisions. Most notably, the IRA includes provisions such as the
extension and expansion of production and investment tax credits for wind and
solar; energy storage, renewable natural gas, and carbon capture and
sequestration; and the transferability of clean energy tax credits. We are
currently evaluating the IRA provisions to determine impacts and opportunities.
Business Segment Recent Developments
•See Note 2 of the Notes to Condensed Consolidated Financial Statements for
recent rate review activity for
•OnOctober 11, 2022 , the WPSC approved a CPCN submitted byWyoming Electric to construct an estimated 260-mile transmission expansion project. The transmission expansion project, known as Ready Wyoming, will provide customers long-term price stability and greater flexibility as power markets develop in the Western States. Construction of the project is expected to take place in multiple phases or segments from 2023 through 2025 and will interconnectSouth Dakota Electric's andWyoming Electric's transmission systems. •OnJuly 21, 2022 ,Wyoming Electric set a new all-time and summer peak load of 294 MW, surpassing the previous summer peaks of 288 MW set onJuly 18, 2022 , 282 MW set onJune 13, 2022 and 274 MW set inJuly 2021 . 34 -------------------------------------------------------------------------------- Table of Contents •OnJuly 18, 2022 ,South Dakota Electric set a new all-time and summer peak load of 403 MW, surpassing the previous summer peak of 397 MW set inJuly 2021 . •OnJune 21, 2022 ,Wyoming Electric completed its first agreement for service under its Blockchain Interruptible Service tariff. Under the five-year agreement,Wyoming Electric will deliver to a new customer inCheyenne, Wyoming up to 45 MW with an option to expand service up to 75 MW. Energy will be sourced through the electric energy market and delivered through ourElectric Utilities' infrastructure. Under the agreement, the customer will be responsible for costs of service, and the load will be interruptible to prioritize the needs ofWyoming Electric's existing retail customers.Wyoming Electric expects to begin delivering energy to this customer in the fourth quarter of 2022. •OnMay 27, 2022 ,Colorado Electric filed its Clean Energy Plan, "2030 Ready Plan", with the CPUC. The 2030 Ready Plan establishes a roadmap and preferred resource portfolio forColorado Electric to achieve the state ofColorado'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 toColorado Electric's system. The final mix of resources would be determined by the results of a competitive solicitation starting in 2023.Colorado legislation provides up to 50% utility ownership of these additions. As proposed, the plan will achieve a 90% reduction in emissions and result in 79% ofColorado Electric's customers' electricity being generated by carbon-free sources by 2030. A CPUC decision on Phase 1 of the 2030 Ready Plan is expected inMarch 2023 , which would be followed by a request for proposals for renewable energy resources. •OnFebruary 23, 2022 ,Wyoming Electric set a new winter peak load of 262 MW, surpassing the previous winter peaks of 252 MW set onJanuary 5, 2022 and 247 MW set inDecember 2019 . •During the first quarter of 2022,Colorado Electric agreed to join SPP's Western Energy Imbalance Service ("WEIS") Market. OnSeptember 26, 2022 ,South Dakota Electric andWyoming Electric also agreed to join the WEIS Market.South Dakota Electric andWyoming Electric will joinColorado Electric in integrating into the WEIS Market inApril 2023 and will continue to study long-term solutions for joining or developing an organized wholesale market. The expansion allows the utilities to participate in a real-time market. •InJanuary 2022 ,South Dakota Electric placed in service a$19 million , 54-mile, 230 kV electric transmission line fromRapid City toSpearfish, South Dakota . The second leg of this transmission line rebuild project, an 85-mile segment fromSpearfish toGillette, Wyoming , is expected to be in service by the end of 2023.
•On
•See Note 2 of the Notes to Condensed Consolidated Financial Statements for
recent rate review activity for
•During the third quarter of 2022,Kansas Gas andNebraska Gas submitted proposals to their respective state utility commissions seeking approval to offer a voluntary RNG and carbon offset program for residential and business customers. The program would allow participants to offset 100% or more of the emissions associated with their own natural gas usage. The offset would be achieved through a combination of carbon offset credits and RNG attributes.Kansas Gas andNebraska Gas designed their voluntary RNG and carbon offset programs as comprehensive four-year pilot programs starting in 2023 and running through 2026. OnOctober 25, 2022 ,Kansas Gas received approval from the KCC for its voluntary RNG and carbon offset program. OnJune 6, 2022 ,Colorado Gas had submitted a similar proposal to the CPUC. In response to intervenor-filed testimony,Colorado Gas filed a motion to withdraw its application which was granted by an administrative law judge onOctober 26, 2022 .
Corporate and Other
•OnApril 13, 2022 , a jury awarded$41 million for claims made byGT Resources, LLC ("GTR") against BHC and two of its subsidiaries (Black Hills Exploration and Production, Inc. andBlack Hills Gas Resources, Inc. ), which ceased oil and natural gas operations in 2018 as part of BHC's decision to exit the exploration and production business. The claims involved a dispute over a 2.3-million-acre concession award inCosta Rica which was acquired by a BHC subsidiary in 2003. We believe we have meritorious defenses to the verdict and have appealed the verdict. See additional information in Note 3 of the Notes to Condensed Consolidated Financial Statements. 35
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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 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 and nine months ended September 30, 2022 and 2021, and
our financial condition as of September 30, 2022 and December 31, 2021 , 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.
In the fourth quarter of 2021, we integrated our power generation and mining
businesses within the Electric Utilities segment. The alignment is consistent
with the current way our CODM evaluates the performance of the business and
makes decisions related to the allocation of resources. Comparative periods
presented reflect this change. See further segment information in Note 12 of
the Notes to Condensed Consolidated Financial Statements.
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.
Consolidated Summary and Overview
Nine Months Ended
Three Months Ended September 30, September 30,
2022 2021 2022 2021
(in thousands, except per share amounts)
Operating income (loss):
Electric Utilities $ 69,483 $ 72,840 $ 165,455 $ 159,645
Gas Utilities 10,583 17,257 162,318 139,336
Corporate and Other (587) (224) (2,552) (3,527)
Operating income 79,479 89,873 325,221 295,454
Interest expense, net (40,019) (38,018) (117,328) (113,820) Other income, net 464 1,560 2,731 1,635 Income tax (expense) (2,090) (5,253) (15,920) (6,333) Net income 37,834 48,162 194,704 176,936 Net income attributable to non-controlling interest (2,861) (4,050) (8,790) (11,347)
Net income available for common stock $ 34,973
Total earnings per share of common stock, Diluted $ 0.54$ 0.70 $ 2.86 $ 2.63
Three Months Ended
The variance to the prior year included the following:
•Electric Utilities' operating income decreased$3.4 million primarily due to higher operating expenses, prior year mark-to-market gains on wholesale energy contacts and lower pricing on the new Wygen I PPA partially offset by increased rider revenues, increased transmission services revenue and off-system excess energy sales and favorable weather; •Gas Utilities' operating income decreased$6.7 million primarily due to higher operating expenses and mark-to-market losses on wholesale commodity contracts partially offset by favorable weather, new rates and rider recovery and carrying costs on our Winter Storm Uri regulatory asset; •Interest expense increased$2.0 million due to higher interest rates and higher short-term borrowings; •Other income decreased$1.1 million primarily due to a prior year recognition of death benefits from Company-owned life insurance; •Income tax expense decreased$3.2 million primarily due to lower pre-tax income; and •Net income attributable to non-controlling interest decreased$1.2 million due to lower net income from Black Hills Colorado IPP primarily driven by lower fired-engine hours. 36 -------------------------------------------------------------------------------- Table of Contents Nine Months EndedSeptember 30, 2022 Compared to Nine Months EndedSeptember 30, 2021 :
The variance to the prior year included the following:
•Electric Utilities' operating income increased$5.8 million primarily due to increased rider revenues, prior year impacts related toColorado Electric's TCJA-related bill credits to customers (which were offset by reduced income tax expense), increased transmission services revenue and off-system excess energy sales and prior year mark-to-market losses on wholesale energy contacts partially offset by higher operating expenses and lower pricing on the new Wygen I PPA; •Gas Utilities' operating income increased$23 million primarily due to new rates and rider recovery, carrying costs on our Winter Storm Uri regulatory asset, prior year Black Hills Energy Services Winter Storm Uri costs, customer growth and increased usage per customer partially offset by higher operating expenses; •Corporate and Other expenses decreased$1.0 million primarily due to an allocation of a 2020 employee cost true-up in the first quarter of 2021, which was offset in our business segments; •Interest expense increased$3.5 million due to higher interest rates and higher short-term and long-term debt balances; •Other income increased$1.1 million primarily due to lower costs for our non-qualified benefit plans which were driven by market performance partially offset by a prior year recognition of death benefits from Company-owned life insurance; •Income tax expense increased$9.6 million driven by higher pre-tax income and a higher effective tax rate primarily due to prior year tax benefits fromColorado Electric and Nebraska Gas TCJA-related bill credits partially offset by tax benefits from state tax rate changes; and •Net income attributable to non-controlling interest decreased$2.6 million due to lower net income from Black Hills Colorado IPP primarily driven by lower fired-engine hours and a planned outage.
Segment Operating Results
A discussion of operating results from our business segments follows.
Non-GAAP Financial Measure
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
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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Electric Utilities
Operating results for the Electric Utilities were as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 Variance 2022 2021 Variance
Revenue:
Electric - regulated $ 245,269 $ 210,053 $ 35,216 $ 635,190 $ 614,652 $ 20,538
Other - non-regulated 13,401 10,351 3,050 34,396 32,172 2,224
Total revenue 258,669 220,404 38,265 669,586 646,824 22,762
Cost of fuel and purchased power:
Electric - regulated 84,309 50,238 34,071 191,511 194,314 (2,803) Other - non-regulated
1,644 893 751 3,484 2,679 805
Total cost of fuel and purchased
power 85,953 51,131 34,822 194,995 196,993 (1,998)
Electric Utility margin (non-GAAP) 172,716 169,273
3,443 474,591 449,831 24,760
Operations and maintenance 68,896 63,472
5,424 207,565 192,507 15,058 Depreciation and amortization
34,337 32,961 1,376 101,571 97,679 3,892
Total operating expenses 103,233 96,433 6,800 309,136 290,186 18,950
Operating income $ 69,483 $ 72,840 $ (3,357) $ 165,455 $ 159,645 $ 5,810 Three Months Ended
Electric Utility margin increased as a result of the following:
(in millions)
New rates and rider recovery $ 3.9
Transmission services and off-system excess energy sales 1.7
Weather 1.0
Commercial and industrial load growth 0.7
Integrated Generation (a) 0.7
Lower pricing on new Wygen I PPA (2.8)
Prior year mark-to-market on wholesale energy contracts (2.5)
Other 0.7
Total increase in Electric Utility margin $ 3.4
__________
(a) Primarily driven by favorable market pricing.
Operations and maintenance expense increased primarily due to higher generation-related expenses, higher vehicle expenses due to higher fuel costs, increased royalties on higher mining revenues partially offset by lower employee costs.
Depreciation and amortization increased primarily due to a higher asset base driven by prior year capital expenditures.
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Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September
30, 2021 :
Electric Utility margin increased as a result of the following:
(in millions)
New rates and rider recovery $ 10.5
Prior year TCJA-related bill credits (a) 9.3
Transmission services and off-system excess energy sales 4.4
Prior year mark-to-market on wholesale energy contracts 2.6
Integrated Generation (b) 1.8
Prior year Winter Storm Uri impacts (c) 1.2
Weather 0.8
Lower pricing on new Wygen I PPA (7.9)
Other 2.1
Total increase in Electric Utility margin $ 24.8
__________
(a) InFebruary 2021 ,Colorado Electric delivered$9.3 million of TCJA-related bill credits to its customers. These bill credits were offset by a reduction in income tax expense and resulted in an immaterial impact to Net income. (b) Primarily driven by favorable market pricing. (c) As a result of Winter Storm Uri, ourElectric Utilities incurred a$0.8 million negative impact to our regulated wholesale power margins due to higher fuel costs and$2.1 million of incremental fuel costs that are not recoverable through our fuel cost recovery mechanisms partially offset by$1.7 million of increased Electric Utility margin realized under Black Hills Wyoming's Economy Energy PSA. Operations and maintenance expense increased primarily due to higher cloud computing licensing costs, higher generation-related expenses, higher vehicle expenses due to higher fuel costs, higher outside services expenses and increased property taxes due to expiration of an abatement partially offset by lower employee 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)
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2022 2021 2022 2021 2022 2021 2022 2021
Residential $ 72,115 $ 66,138 $ 187,217 $ 192,349 421,782 419,001 1,137,139 1,150,150
Commercial 77,314 70,696 210,423 214,512 581,239 576,037 1,581,487 1,570,455
Industrial 47,090 37,323 120,688 115,518 483,223 459,076 1,411,919 1,316,060
Municipal 6,093 5,069 15,660 14,471 46,745 47,515 122,290 123,620Subtotal Retail Revenue - Electric 202,612 179,226 533,989
536,850 1,532,989 1,501,629 4,252,835 4,160,285 Contract Wholesale 8,378 3,855 18,639 12,787 160,070 129,221 492,922 415,979 Off-system/Power Marketing Wholesale 16,769 13,511 32,590 25,549 131,469 120,224 436,335 329,426 Other (a) 17,509 13,461 49,972 39,466 - - - - Total Regulated 245,269 210,053 635,190 614,652 1,824,528 1,751,074 5,182,092 4,905,690 Non-Regulated (b) 13,401 10,351 34,396 32,172 59,745 56,583 221,609 197,506
Total Revenue and Quantities Sold
1,884,273 1,807,657 5,403,701 5,103,196
Other Uses, Losses or Generation, net (c) 125,613 139,521 337,222 367,201 Total Energy 2,009,886 1,947,178 5,740,923 5,470,397 __________
(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
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Revenue (in thousands) Quantities Sold (MWh)
Nine Months Ended September
Three Months Ended September 30, 30, Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021 2022 2021 2022 2021
Colorado Electric $ 96,380 $ 82,971 $ 243,022 $ 226,417 647,532 667,477 1,836,010 1,817,821
South Dakota Electric 94,281 80,674 249,073 247,443 684,059 630,832 1,928,454 1,794,308
Wyoming Electric 55,058 46,813 144,293 142,364 492,938 452,765 1,417,629 1,293,561
Integrated Generation 12,950 9,946 33,198 30,600 59,744 56,583 221,608 197,506
Total Revenue and Quantities
Sold $ 258,669 $ 220,404 $ 669,586 $ 646,824 1,884,273 1,807,657 5,403,701 5,103,196
Three Months Ended September 30, Nine Months Ended September 30,
Quantities Generated and Purchased by Fuel
Type (MWh) 2022 2021 2022 2021
Generated:
Coal 736,181 711,148 1,989,057 1,953,104
Natural Gas and Oil 457,790 508,170 1,016,369 1,259,111
Wind 143,278 162,924 641,302 572,507
Total Generated 1,337,249 1,382,242 3,646,728 3,784,722
Purchased:
Coal, Natural Gas, Oil and Other Market
Purchases 609,699 495,905 1,805,904 1,441,792
Wind 62,938 69,031 288,291 243,883
Total Purchased 672,637 564,936 2,094,195 1,685,675
Total Generated and Purchased 2,009,886 1,947,178 5,740,923 5,470,397
Three Months Ended September 30, Nine Months Ended September 30,
Quantities Generated and Purchased (MWh) 2022 2021 2022 2021
Generated:
Colorado Electric 127,090 150,646 324,638 351,723
South Dakota Electric 510,443 538,632 1,333,984 1,450,113
Wyoming Electric 236,761 221,845 667,079 618,375
Integrated Generation 462,955 471,119 1,321,027 1,364,511
Total Generated 1,337,249 1,382,242 3,646,728 3,784,722
Purchased:
Colorado Electric 251,076 244,613 807,442 716,506
South Dakota Electric 221,872 150,269 667,560 446,904
Wyoming Electric 174,946 146,489 551,683 454,091
Integrated Generation 24,743 23,565 67,510 68,174
Total Purchased 672,637 564,936 2,094,195 1,685,675
Total Generated and Purchased 2,009,886 1,947,178 5,740,923 5,470,397
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Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Variance from Variance from Variance from Variance from
Degree Days Actual Normal Actual Normal Actual Normal
Actual Normal
Heating Degree Days:
Colorado Electric 25 (66) % 22 (78) % 3,296 4 % 3,348 (1) %
South Dakota Electric 91 (57) % 90 (60) % 4,560 - % 4,462 - %
Wyoming Electric 119 (60) % 112 (62) % 4,410 (2) % 4,594 2 %
Combined (a) 66 (60) % 63 (65) % 3,952 1 % 3,979 - %
Cooling Degree Days:
Colorado Electric 1,028 28 % 942 38 % 1,361 27 % 1,242 39 %
South Dakota Electric 707 38 % 649 22 % 814 35 % 816 29 %
Wyoming Electric 580 72 % 487 63 % 701 77 % 604 74 %
Combined (a) 828 36 % 751 35 % 1,041 34 % 968 39 %
__________
(a) Degree days are calculated based on a weighted average of total customers
by state.
Three Months Ended September 30, Nine Months Ended September 30,
Contracted generating facilities Availability
by fuel type (a) 2022 2021 2022 2021
Coal (b) (c) 96.5 % 94.4 % 89.7 % 88.9 %
Natural gas and diesel oil 97.0 % 97.4 % 95.8 % 95.0 %
Wind 94.4 % 96.5 % 94.6 % 95.7 %
Total Availability 96.4 % 96.4 % 94.0 % 93.5 %
Wind Capacity Factor 22.9 % 26.8 % 34.7 % 30.9 %
__________(a) Availability and Wind Capacity Factor are calculated using a weighted average based on capacity of our generating fleet. (b) 2022 included planned outages at Neil Simpson II and Wyodak Plant. (c) 2021 included planned outages at Neil Simpson II, Wygen, Wygen II, and Wygen III and unplanned outages at Neil Simpson II and Wyodak Plant.
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Gas Utilities Operating results for the
Three Months Ended September 30 ,
Nine Months Ended
2022 2021 Variance 2022 2021 Variance
Revenue:
Natural gas - regulated $ 192,104 $ 150,075 $ 42,029 $ 1,046,910 $ 700,617 $ 346,293
Other - non-regulated 16,184 14,608 1,576 56,938 52,635 4,303
Total revenue 208,288 164,683 43,605 1,103,849 753,252 350,597
Cost of natural gas sold:
Natural gas - regulated 77,590 43,884 33,706 588,007 289,168 298,839
Other - non-regulated 5,187 (750) 5,937 11,242 10,131 1,111
Total cost of natural gas sold 82,778 43,134 39,644 599,249 299,299 299,950
Gas Utility margin (non-GAAP) 125,510 121,549
3,961 504,600 453,953 50,647
Operations and maintenance 85,311 78,161 7,150 255,441 237,624 17,817 Depreciation and amortization 29,616 26,131 3,485 86,841 76,993 9,848 Total operating expenses 114,927 104,292 10,635 342,282 314,617 27,665 Operating income$ 10,583 $ 17,257 $ (6,674) $ 162,318 $ 139,336 $ 22,982
Three Months Ended
Gas Utility margin increased as a result of the following:
(in millions)
Weather (a) $
4.4
New rates and rider recovery
3.5
Carrying costs on Winter Storm Uri regulatory asset (b)
1.9
Mark-to-market on non-utility natural gas commodity contracts
(2.5)
Decreased usage per customer
(0.9)
Other
(2.4)
Total increase in Gas Utility margin $
4.0
__________
(a) Weather impacts for the three months endedSeptember 30, 2022 compared to the same period in the prior year include$3.8 million of increased irrigation loads to agriculture customers in ourNebraska Gas service territory. (b) In certain jurisdictions, we have Commission approval to recover carrying costs on Winter Storm Uri regulatory assets which offset increased interest expense. See Note 2 of the Notes to Condensed Consolidated Financial Statements for additional information. Operations and maintenance expense increased primarily due to increased bad debt expense primarily attributable to higher customer billings, higher outside services and materials expenses, and higher vehicle expenses due to higher fuel costs partially offset by lower employee costs.
Depreciation and amortization increased primarily due to a higher asset base driven by prior year capital expenditures.
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Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September
30, 2021 :
Gas Utility margin increased as a result of the following:
(in millions)
New rates and rider recovery $ 21.0
Carrying costs on Winter Storm Uri regulatory asset (a) 16.5
Prior year Black Hills Energy Services Winter Storm Uri costs (b)
8.2
Customer growth and increased usage per customer 4.8
Weather (c) 3.4
Increased transportation and transmission volumes 1.1
Current and prior year TCJA-related bill credits (d) 0.8
Mark-to-market on non-utility natural gas commodity contracts (3.4)
Other (1.8)
Total increase in Gas Utility margin $ 50.6
__________
(a) In certain jurisdictions, we have Commission approval to recover carrying costs on Winter Storm Uri regulatory assets which offset increased interest expense. Additionally, the carrying costs accrued during the nine months endedSeptember 30, 2022 included a one-time,$10.3 million true-up to reflect Commission authorized rates. See Note 2 of the Notes to Condensed Consolidated Financial Statements for additional information. (b)Black Hills Energy Services offers fixed contract pricing for non-regulated gas supply services to our regulated natural gas customers. The increased cost of natural gas sold during Winter Storm Uri was not recoverable through a regulatory mechanism. (c) Weather impacts for the nine months endedSeptember 30, 2022 compared to the same period in the prior year include$4.3 million of increased irrigation loads to agriculture customers in ourNebraska Gas service territory. (d) InJune 2021 ,Nebraska Gas provided$2.9 million TCJA-related bill credits to its customers. For the nine months endedSeptember 30, 2022 ,Kansas Gas provided$2.1 million of TCJA and state tax reform bill credits to customers. These bill credits were offset by a reduction in income tax expense and resulted in a minimal impact to Net income. Operations and maintenance expense increased primarily due to increased bad debt expense primarily attributable to higher customer billings, higher cloud computing licensing costs, higher outside services and materials expenses, higher vehicle expenses due to higher fuel costs and increased property taxes due to a higher asset base partially offset by lower employee 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 and Transported (Dth)
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2022 2021 2022 2021 2022 2021 2022 2021
Residential $ 85,398 $ 68,646 $ 604,568 $ 401,413 3,572,971 3,564,722 43,910,976 42,708,511
Commercial 36,819 27,038 256,643 155,015 2,374,179 2,426,019 21,505,127 20,732,271
Industrial 26,155 13,863 52,268 24,576 3,153,641 2,873,540 6,468,756 5,109,501
Other 2,566 2,706 7,638 1,816 - - - -
Total Distribution 150,937 112,253 921,117 582,820 9,100,791 8,864,281 71,884,859 68,550,283
Transportation and
Transmission 41,166 37,822 125,794 117,797 35,302,591 34,735,601 117,971,404 114,124,253
Total Regulated 192,104 150,075 1,046,910 700,617 44,403,382 43,599,882 189,856,263 182,674,536
Non-regulated Services 16,184 14,608 56,938 52,635 - - - -
Total Revenue and
Quantities Sold $ 208,288 $ 164,683 $ 1,103,849 $ 753,252 44,403,382 43,599,882 189,856,263 182,674,536
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Revenue (in thousands) Quantities Sold & Transported (Dth)
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2022 2021 2022 2021 2022 2021 2022 2021
Arkansas Gas $ 30,663 $ 25,188 $ 210,287 $ 145,176 4,396,388 4,319,944 22,769,574 23,345,095
Colorado Gas 32,239 22,452 202,620 135,764 3,408,420 3,798,587 23,192,881 23,121,887
Iowa Gas 24,580 22,015 187,209 108,600 5,103,212 5,810,932 28,658,007 27,141,518
Kansas Gas 38,029 25,972 132,362 87,198 9,202,701 9,075,960 28,954,575 26,694,184
Nebraska Gas 61,588 51,538 258,159 187,673 17,237,325 16,174,821 61,287,579 59,281,802
Wyoming Gas 21,189 17,518 113,212 88,841 5,055,336 4,419,638 24,993,647 23,090,050
Total Revenue and
Quantities Sold $ 208,288 $ 164,683 $ 1,103,849 $ 753,252 44,403,382 43,599,882 189,856,263 182,674,536
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Variance Variance Variance Variance
Heating Degree Days Actual from Normal Actual from Normal Actual from Normal Actual from Normal
Arkansas Gas (a) 16 (63)% 11 (74)% 2,386 (4)% 2,515 1%
Colorado Gas 84 (61)% 92 (51)% 3,847 (6)% 3,922 (4)%
Iowa Gas 92 (34)% 42 (70)% 4,474 7% 4,155 (1)%
Kansas Gas (a) 23 (58)% 10 (82)% 3,043 3% 3,079 4%
Nebraska Gas 48 (56)% 33 (70)% 3,768 -% 3,754 (1)%
Wyoming Gas 140 (55)% 153 (50)% 4,738 1% 4,778 1%
Combined (b) 70 (53)% 53 (61)% 4,003 -% 3,978 -%
__________
(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 September 30, Nine Months Ended September 30,
2022 2021 Variance 2022 2021 Variance
Operating (loss) $ (587) $ (224) $
(363)
Three Months Ended
Operating (loss) was comparable to the same period in the prior year.
Nine Months Ended
The decrease in Operating (loss) was primarily due to an allocation of a 2020 employee cost true-up in the first quarter of 2021, which was offset in our business segments.
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Consolidated Interest Expense, Other Income and Income Tax Expense
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 Variance 2022 2021 Variance
(in thousands)
Interest expense, net $ (40,019) $ (38,018) $ (2,001) $ (117,328) $ (113,820) $ (3,508)
Other income, net 464 1,560 $ (1,096) $ 2,731 $ 1,635 $ 1,096
Income tax (expense) (2,090) (5,253) $ 3,163 $ (15,920) $ (6,333) $ (9,587) Three Months Ended
Interest Expense, net
The increase in Interest expense, net was due to higher interest rates and higher short-term debt balances.
Other Income, net
The decrease in Other income, net was primarily driven by a prior year recognition of death benefits from Company-owned life insurance.
Income Tax (Expense)
Income tax expense decreased primarily due to lower pre-tax income partially offset by lower effective tax rate. For the three months endedSeptember 30, 2022 , the effective tax rate was 5.2% compared to 9.8% for the same period in 2021. See Note 11 of the Notes to Condensed Consolidated Financial Statements for discussion of effective tax rate variances.
Nine Months Ended
Interest Expense, net
The increase in Interest expense, net was due to higher interest rates and higher short-term and long-term debt balances.
Other Income, net
The increase in Other income, net was due to lower costs for our non-qualified benefit plans which were driven by market performance and a prior year recognition of death benefits from Company-owned life insurance partially offset by higher non-service pension costs primarily driven by a higher discount rate.
Income Tax (Expense)
Income tax expense increased due to higher pre-tax income and a higher effective tax rate. For the nine months endedSeptember 30, 2022 , the effective tax rate was 7.6% compared to 3.5% for the same period in 2021. See Note 11 of the Notes to Condensed Consolidated Financial Statements for discussion of effective tax rate variances. Liquidity and Capital Resources
There have been no material changes in Liquidity and Capital Resources from those reported in Item 7 of our 2021 Annual Report on Form 10-K except as described below.
Cash Flow Activities
The following table summarizes our cash flows for the nine months ended
Cash provided by (used in): 2022 2021 Variance
Operating activities $ 494,287 $ (144,760) $ 639,047
Investing activities $ (466,321) $ (484,106) $ 17,785
Financing activities $ (24,684) $ 633,061 $
(657,745)
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-------------------------------------------------------------------------------- Table of Contents Nine Months EndedSeptember 30, 2022 Compared to the Nine Months EndedSeptember 30, 2021 Operating Activities:
Net cash provided by (used in) operating activities was
•Cash earnings (net income plus non-cash adjustments) were$28 million higher for the nine months endedSeptember 30, 2022 compared to the same period in the prior year primarily due to increased Electric and Gas Utility margins driven by new rates and increased rider revenues and prior year impacts from Winter Storm Uri.
•Net inflows from changes in certain operating assets and liabilities were
•Cash inflows increased by$687 million as a result of changes in our regulatory assets and liabilities primarily driven by prior year incremental fuel, purchased power and natural gas costs due to Winter Storm Uri and current year recovery of a portion of Winter Storm Uri incremental and carrying costs from customers;
•Cash inflows decreased by
•Cash outflows decreased by$26 million as a result of changes in accounts payable and accrued liabilities primarily driven by payment timing of natural gas and power purchases and other working capital requirements.
•Cash outflows increased by
Investing Activities:
Net cash used in investing activities was
•Capital expenditures of$466 million for the nine months endedSeptember 30, 2022 compared to$498 million for the same period in the prior year. Lower current year expenditures were driven by lower programmatic safety, reliability and integrity spending at our Gas andElectric Utilities ; and •Cash inflows decreased by$14 million for other investing activities which was primarily driven by prior year sales of transmission assets and facilities, none of which were individually material.
Financing Activities:
Net cash provided by (used in) financing activities was
•Cash inflows decreased
•Cash inflows decreased
•Cash outflows increased
•Cash inflows increased by
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--------------------------------------------------------------------------------Table of Contents Capital Resources Short-term Debt
Revolving Credit Facility and CP Program
Our Revolving Credit Facility and CP Program had the following borrowings, outstanding letters of credit and available capacity:
Short-term borrowings Letters of Credit (a)
Current at at Available Capacity at
Credit Facility Expiration Capacity September 30, 2022 September 30, 2022 September 30, 2022
(in millions)
Revolving Credit
Facility and CP
Program July 19, 2026 $ 750 $ 501 $ 20 $ 229
__________(a) Letters of credit are off-balance sheet commitments that reduce the borrowing capacity available on our corporate Revolving Credit Facility. For more information on these letters of credit, see Note 5 of the Notes to Condensed Consolidated Financial Statements.
The weighted average interest rate on short-term borrowings at
(dollars in millions)
Maximum amount outstanding (based on daily outstanding balances) $ 508
Average amount outstanding (based on daily outstanding balances) $
347
Weighted average interest rates 1.41 %
Covenant Requirements
Equity
See Note 5 of the Notes to Condensed Consolidated Financial Statements for information related to common stock issuances under the ATM.
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, or through a non-controlling investment by a third party in certain operating assets. We plan to re-finance our$525 million , 4.25%, senior unsecured notes dueNovember 30, 2023 , at or before maturity date. 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, 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) On August 26, 2022 , S&P reported BBB+ rating and maintained a Stable
outlook.
(b) On December 20, 2021 , Moody's reported Baa2 rating and maintained a Stable
outlook.
(c) On October 6, 2022 , Fitch reported BBB+ rating and maintained a Stable
outlook.
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The following table represents the credit ratings ofSouth Dakota Electric atSeptember 30, 2022 : Rating Agency Senior Secured Rating S&P (a) A Fitch (b) A __________ (a) OnMarch 31, 2022 , S&P reported A rating. (b) OnOctober 6, 2022 , Fitch reported A rating. Capital Requirements Capital Expenditures Actual Forecasted (c) Nine Months Ended Capital Expenditures by September 30, 2022 Segment (a) 2022 (b) 2023 2024 2025 2026 (in millions) Electric Utilities $ 180$ 255 $ 197 $ 348 $ 226 $ 194 Gas Utilities 255 364 386 452 412 393 Corporate and Other 7 8 17 19 20 19 Incremental Projects (d) - - - - 45 100 $ 442$ 627 $ 600 $ 819 $ 703 $ 706 __________ (a) Includes accruals for property, plant and equipment as disclosed in supplemental cash flow information in the Condensed Consolidated Statements of Cash Flows in the Condensed Consolidated Financial Statements. (b) Includes actual capital expenditures for the nine months endedSeptember 30, 2022 . (c) The increase in forecasted capital expenditures is primarily driven by RNG projects at ourGas Utilities . Additionally, we have identified various other projects at our Electric andGas Utilities that we previously disclosed as incremental. (d) These represent projects that are being evaluated by our segments for timing, cost and other factors.
Dividends
Dividends paid on our common stock totaled$116 million for the nine months endedSeptember 30, 2022 , or$0.595 per share per quarter. OnOctober 25, 2022 , our board of directors declared a quarterly dividend of$0.625 per share payableDecember 1, 2022 , equivalent to an annual dividend of$2.50 per share. The amount of 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.
Unconditional Purchase Obligations
See Note 3 of the Notes to Condensed Consolidated Financial Statements for recent updates to our purchase obligations.
Critical Accounting Estimates
There have been no material changes in our critical accounting estimates from
those reported in our 2021 Annual Report on Form 10-K. We are closely monitoring
the impacts of recent macroeconomic trends and Winter Storm Uri on our critical
accounting estimates including, but not limited to, collectibility of customer
receivables, cost recoverability through regulatory assets, impairment risk of
goodwill and long-lived assets, valuation of pension assets and liabilities and
contingent liabilities. For more information on our critical accounting
estimates, see Part II, Item 7 of our 2021 Annual Report on Form 10-K.
New Accounting Pronouncements
Other than the pronouncements reported in our 2021 Annual Report on Form 10-K
and those discussed in Note 1 of the Notes to Condensed 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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