QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2019
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
1-7978
Black Hills Power, Inc.
Incorporated in
South Dakota
IRS Identification Number
46-0111677
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
x
No o
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 and post such files).
Yes
x
No o
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
o
Accelerated Filer
o
Non-accelerated Filer
x
(Do not check if a smaller reporting company)
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 x
Securities registered pursuant to Section 12(b) of the Act: None
As of July 31, 2019, there were issued and outstanding 23,416,396 shares of the Registrant’s common stock, $1.00 par value, all of which were held beneficially and of record by Black Hills Corporation.
Reduced Disclosure
The Registrant meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.
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
ASC
Accounting Standards Codification
ASU
Accounting Standards Update issued by the FASB
BHC
Black Hills Corporation; the Parent Company
Black Hills Energy
The name used to conduct the business of BHC utility companies
Black Hills Service Company
Black Hills Service Company, LLC, a direct, wholly-owned subsidiary of BHC
Cheyenne Light
Cheyenne Light, Fuel and Power Company, a direct, wholly-owned subsidiary of Black Hills Corporation (doing business as Black Hills Energy and providing electric service)
Cooling degree day (CDD)
A cooling degree day is equivalent to each degree that the average of the high and low temperature 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 of weather 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.
CPCN
Certificate of Public Convenience and Necessity
FASB
Financial Accounting Standards Board
FERC
United States Federal Energy Regulatory Commission
Fitch
Fitch Ratings
GAAP
Accounting principles generally accepted in the United States of America
Happy Jack
Happy Jack Wind Farms, LLC, a subsidiary of Duke Energy Generation Services
Heating degree day (HDD)
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 of weather 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.
Horizon Point
BHC Corporate headquarters building in Rapid City, South Dakota, which was completed in 2017.
LIBOR
London Interbank Offered Rate
Moody’s
Moody’s Investors Service, Inc.
MW
Megawatts
MWh
Megawatt-hours
Parent
Black Hills Corporation
SDPUC
South Dakota Public Utilities Commission
SEC
U. S. Securities and Exchange Commission
Silver Sage
Silver Sage Windpower, LLC, a subsidiary of Duke Energy Generation Services
South Dakota Electric
Black Hills Power, which includes operations in South Dakota, Wyoming and Montana
S&P
Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.
TCJA
Tax Cuts and Jobs Act enacted December 22, 2017
WPSC
Wyoming Public Service Commission
WRDC
Wyodak Resources Development Corp., an indirect, wholly-owned subsidiary of BHC
Wygen III
110 MW mine-mouth coal-fired power plant in which BHP owns a 52% interest, MDU owns a 25% interest and the City of Gillette owns the remaining 23% interest. BHP operates the plant.
Wyodak Plant
Wyodak, a 362 MW mine-mouth coal-fired plant in Gillette, Wyoming, owned 80% by Pacificorp and 20% by Black Hills Energy South Dakota. Our WRDC mine supplies all of the fuel for the plant.
Wyoming Electric
Includes Cheyenne Light’s electric utility operations
(Reference is made to Notes to Financial Statements
included in our 2018 Annual Report on Form 10-K)
(1) MANAGEMENT’S STATEMENT
The unaudited condensed financial statements included herein have been prepared by Black Hills Power, Inc. (the “Company,” “we,” “us,” 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 condensed financial statements should be read in conjunction with the financial statements and the notes thereto, included in our 2018 Annual Report on Form 10-K filed with the SEC.
The information furnished in the accompanying condensed 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 June 30, 2019, December 31, 2018 and June 30, 2018 financial information and are of a normal recurring nature. The results of operations for the three and six months ended June 30, 2019 and June 30, 2018, and our financial condition as of June 30, 2019 and December 31, 2018 are not necessarily indicative of the results of operations and financial condition to be expected as of or for any other period.
Recently Issued Accounting Standards
Financial Instruments -- Credit Losses: Measurement of Credit Losses on Financial Instruments, ASU 2018-19
In June 2016, the FASB issued ASU 2016-13, Financial Instruments -- Credit Losses: Measurement of Credit Losses on Financial Instruments, which was subsequently amended by ASU 2018-19 in November 2018. The standard introduces new accounting guidance for credit losses on financial instruments within its scope, including trade receivables. This new guidance adds an impairment model that is based on expected losses rather than incurred losses. It is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the impacts of adopting this standard.
Recently Adopted Accounting Standards
Leases, ASU 2016-02
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by requiring the recognition of right-of-use assets and lease liabilities on the balance sheet for most leases, whereas previously only financing-type lease liabilities (capital leases) were recognized on the balance sheet. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.
We adopted the standard effective January 1, 2019. We elected the option to not recast comparative periods presented with transitioning to the new lease standard and will report these comparative periods as presented under previous lease guidance. In addition, we elected the package of practical expedients permitted under the transition guidance with the new standard, which among other things, allowed us to carry forward the historical lease classification. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment of existing land easement agreements.
Adoption of the new standard resulted in the recording of an operating lease right-of-use asset and an off-setting operating lease obligation liability of $14 million as of January 1, 2019. The lease standard did not materially impact our net earnings and had no impact on cash flows.
As of January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and its related amendments (collectively known as ASC 606). Revenue is recognized in an amount that reflects the consideration we expect to receive in exchange for goods or services, when control of the promised goods or services is transferred to our customers. The following table depicts the disaggregation of revenue, from contracts with customers by customer type and timing of revenue recognition for the three and six months ended June 30, 2019 and 2018. Sales tax and other similar taxes are excluded from revenues.
Three Months Ended June 30, 2019
Three Months Ended June 30, 2018
Six Months Ended June 30, 2019
Six Months Ended June 30, 2018
(in thousands)
Customer types:
Retail
$
46,809
$
46,525
$
99,885
$
97,166
Wholesale
6,780
8,191
15,123
17,241
Market - off-system sales
2,393
3,449
7,063
5,724
Transmission/Other
13,083
12,372
25,914
24,090
Revenue from contracts with customers
69,065
70,537
147,985
144,221
Other revenues
181
139
302
270
Total revenues
$
69,246
$
70,676
$
148,287
$
144,491
Timing of revenue recognition:
Services transferred over time
$
69,065
$
70,537
$
147,985
$
144,221
Revenue from contracts with customers
$
69,065
$
70,537
$
147,985
$
144,221
Contract Balances
The nature of our primary revenue contracts provides an unconditional right to consideration upon service delivery; therefore, no customer contract assets or liabilities exist. The unconditional right to consideration is represented by the balance in our Accounts receivable and is further discussed in Note 3. We do not typically incur costs that would be capitalized, to obtain or fulfill a revenue contract.
(3)
ACCOUNTS RECEIVABLE
Following is a summary of Accounts receivable, net included in the accompanying Condensed Balance Sheets (in thousands) as of:
Our regulated electric operations are subject to regulation by various state and federal agencies. The accounting policies followed are generally subject to the Uniform System of Accounts of the FERC.
Our regulatory assets and liabilities were as follows (in thousands) as of:
June 30, 2019
December 31, 2018
Regulatory assets:
Loss on reacquired debt (a)
$
1,124
$
1,259
Deferred taxes on AFUDC (b)
4,955
5,020
Employee benefit plans and related deferred taxes (c)
20,022
19,868
Deferred energy and fuel cost adjustments (b)
22,195
20,334
Deferred taxes on flow through accounting (c)
9,201
8,749
Decommissioning costs (a)
7,168
8,196
Vegetation management (a)
9,214
10,366
Other regulatory assets (a)
1,824
1,940
Total regulatory assets
$
75,703
$
75,732
Less current regulatory assets
(22,339
)
(19,052
)
Regulatory assets, non-current
$
53,364
$
56,680
Regulatory liabilities:
Cost of removal for utility plant (a)
$
54,947
$
52,366
Employee benefit plan costs and related deferred taxes (c)
7,518
7,518
Excess deferred income taxes (c)
99,417
100,276
TCJA revenue reserve
2,392
2,523
Other regulatory liabilities (c)
222
533
Total regulatory liabilities
$
164,496
$
163,216
Less current regulatory liabilities
(2,392
)
(2,574
)
Regulatory liabilities, non-current
$
162,104
$
160,642
____________________
(a)
We are allowed a recovery of costs, but we are not allowed a rate of return.
(b)
In addition to recovery of costs, we are allowed a rate of return.
(c)
In addition to recovery or repayment of costs, we are allowed a return on a portion of this amount or a reduction in rate base.
Regulatory Matters
There have been no significant changes to our Regulatory Matters from those previously disclosed in Note 1 of the Notes to the Financial Statements in our 2018 Annual Report on Form 10-K except as reported below.
Renewable Ready Service Tariffs and Corriedale Wind Energy Project
South Dakota Electric and Wyoming Electric received approvals for the Renewable Ready Service Tariffs and related jointly-filed CPCN to construct the $57 million, 40 MW Corriedale Wind Energy Project. The wind project will be jointly owned by the two electric utilities to deliver renewable energy for large commercial and industrial customers and governmental agencies. The project is expected to be in service in 2020.
We did not record any dividends for the six months ended June 30, 2019. We recorded non-cash dividends to our Parent of $26 million and decreased the utility Money pool note receivable by $26 million for the six months ended June 30, 2018.
Receivables and Payables
We have accounts receivable and accounts payable balances related to transactions with other BHC subsidiaries. The balances were as follows (in thousands) as of:
June 30, 2019
December 31, 2018
Accounts receivable from affiliates
$
5,102
$
8,119
Accounts payable to affiliates
$
24,737
$
25,804
Money Pool Notes Receivable and Notes Payable
We participate in the Utility Money Pool Agreement (the Agreement). Under the Agreement, we may borrow from the pool; however the Agreement restricts the pool from loaning funds to BHC or to any of BHC’s non-utility subsidiaries. The Agreement does not restrict us from paying dividends to BHC. Borrowings under the Agreement bear interest at the weighted average daily cost of our parent company’s external borrowings as defined under the Agreement, or if there are no external funds outstanding on that date, then the rate will be the daily one-month LIBOR plus 1.0%. At June 30, 2019, the average cost of borrowing under the Utility Money Pool was 2.78%.
We had the following balances with the Utility Money Pool (in thousands) as of:
June 30, 2019
December 31, 2018
Money pool notes payable
$
13,071
$
38,690
Our net interest income (expense) relating to balances with the Utility Money Pool was as follows (in thousands):
Three Months Ended June 30,
Six Months Ended June 30,
2019
2018
2019
2018
Net interest income (expense)
$
(198
)
$
(96
)
$
(471
)
$
(132
)
Notes payable to Parent
June 30, 2019
December 31, 2018
Notes payable to Parent (a)
$
25,000
$
—
(a) Note bears interest at 4.51%, expires December 31, 2019, and is eligible for annual renewal. Interest payable related to this note was $0.2 million as of June 30, 2019.
The components of net periodic benefit cost for the Supplemental Non-qualified Defined Benefit Plans were as follows (in thousands):
Three Months Ended June 30,
Six Months Ended June 30,
2019
2018
2019
2018
Interest cost
$
28
$
27
$
57
$
54
Net loss (gain)
17
26
33
52
Net periodic benefit cost
$
45
$
53
$
90
$
106
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 for 2019 and anticipated contributions for 2019 and 2020 are as follows (in thousands):
Financial instruments for which the carrying amount did not equal the fair value were as follows (in thousands) as of:
June 30, 2019
December 31, 2018
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Long-term debt, including current maturities (a) (b)
$
340,105
$
447,036
$
340,035
$
412,894
_________________
(a)
Long-term debt is valued based on observable inputs available either directly or indirectly for similar liabilities in active markets and therefore is classified in Level 2 in the fair value hierarchy.
(b)
Carrying amount of long-term debt is net of deferred financing costs.
(8)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Six Months Ended June 30,
2019
2018
(in thousands)
Non-cash investing and financing activities -
Property, plant and equipment acquired with accrued liabilities
$
15,316
$
7,477
Non-cash (decrease) to money pool notes receivable, net
$
—
$
(26,000
)
Non-cash dividend to Parent
$
—
$
26,000
Cash (paid) refunded during the period for -
Interest (net of amounts capitalized)
$
(11,342
)
$
(10,930
)
(9)
COMMITMENTS AND CONTINGENCIES
There have been no significant changes to commitments and contingencies from those previously disclosed in Note 11 of our Notes to the Financial Statements in our 2018 Annual Report on Form 10-K.
(10)
LEASES
We have a ground lease for the Wygen III generating facility with an affiliate and communication tower site and operation center facility leases with third parties. Our leases have remaining terms ranging from less than one year to 30 years.
The components of lease expense were as follows (in thousands):
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Amounts are presented on a pre-tax basis unless otherwise indicated.
Minor differences in amounts may result due to rounding.
Significant Events
On July 23, 2019, Fitch affirmed South Dakota Electric’s credit rating at A.
South Dakota Electric and Wyoming Electric received approvals for the Renewable Ready Service Tariffs and related jointly-filed CPCN to construct the $57 million, 40-megawatt Corriedale Wind Energy Project. The wind project will be jointly owned by the two electric utilities to deliver renewable energy for large commercial and industrial customers and governmental agencies. The project is expected to be in service in 2020.
South Dakota Electric continued construction on a 175-mile electric transmission line from Stegall, Nebraska to Rapid City, South Dakota. The 94-mile final segment of the transmission line is expected to be in service in the fall of 2019.
On April 30, 2019, S&P affirmed South Dakota Electric’s credit rating at A.
Results of Operations
The following discussion includes financial information prepared in accordance with GAAP, as well as another financial measure, gross 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. Gross margin (revenue less cost of sales) is a non-GAAP financial measure due to the exclusion of depreciation and amortization from the measure. The presentation of gross margin is intended to supplement investors’ understanding of our operating performance.
Gross margin is calculated as operating revenue less cost of fuel and purchased power. Our gross margin is impacted by the fluctuations in purchased power, natural gas and other fuel supply costs. However, while these fluctuating costs impact gross margin as a percentage of revenue, they only impact total gross margin if the costs cannot be passed through to our customers.
Our gross margin measure may not be comparable to other companies’ gross margin measure. Furthermore, this measure is not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance.
The following tables provide certain financial information and operating statistics:
Three Months Ended June 30,
Six Months Ended June 30,
2019
2018
Variance
2019
2018
Variance
(in thousands)
Revenue
$
69,246
$
70,676
$
(1,430
)
$
148,287
$
144,491
$
3,796
Fuel and purchased power
18,381
20,753
(2,372
)
41,114
43,193
(2,079
)
Gross margin (non-GAAP)
50,865
49,923
942
107,173
101,298
5,875
Operating expenses
33,555
30,428
3,127
65,221
61,439
3,782
Operating income
17,310
19,495
(2,185
)
41,952
39,859
2,093
Interest income (expense), net
(5,277
)
(5,379
)
102
(10,709
)
(10,803
)
94
Other income (expense), net
291
(242
)
533
(84
)
(359
)
275
Income tax expense
(2,176
)
(2,749
)
573
(5,514
)
(5,812
)
298
Net income
$
10,148
$
11,125
$
(977
)
$
25,645
$
22,885
$
2,760
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018. Net income was $26 million compared to $23 million for the same period in the prior year primarily due to the following:
Gross marginincreased primarily due to a $3.2 million reduction in the purchased power capacity charges and higher rider revenues of $1.4 million related to transmission investment recovery. Higher power marketing revenue, customer growth, and favorable weather, comprised the remainder of the increase.
Operating expensesincreased primarily due to higher outside services expenses and higher employee costs driven by increased headcount partially offset by a decrease in expenses due to generation outages.
Electric Revenue by Customer Type
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands)
2019
Percentage Change
2018
2019
Percentage Change
2018
Residential
$
15,570
(5)%
$
16,426
$
36,760
(2)%
$
37,487
Commercial
22,131
(6)%
23,538
45,275
(4)%
47,082
Industrial
8,576
5%
8,170
16,933
3%
16,446
Municipal
776
(11)%
876
1,557
(8)%
1,687
Total retail revenue
47,053
(4)%
49,010
100,525
(2)%
102,702
Wholesale (a)
6,780
(17)%
8,191
15,123
(12)%
17,241
Market - off-system sales (b)
2,393
(31)%
3,449
7,063
23%
5,724
Other revenue (c)
13,020
30%
10,026
25,576
36%
18,824
Total revenue
$
69,246
(2)%
$
70,676
$
148,287
3%
$
144,491
____________________
(a)
Decrease for the six months ended June 30, 2019 was primarily driven by prior year increased volumes on long-term wholesale contracts.
(b)
Increase for the six months ended June 30, 2019 was driven by weather and energy prices.
(c)
Increase for the six months ended June 30, 2019 was primarily due to the prior year reserve to revenue to reflect the reduction of the lower federal income tax rate from the TCJA on our existing rate tariffs.
Includes company uses, line losses, and excess exchange production.
Megawatt Hours Generated and Purchased
Three Months Ended June 30,
Six Months Ended June 30,
Generated -
2019
Percentage Change
2018
2019
Percentage Change
2018
Coal-fired (a)
287,201
(26)%
388,081
696,867
(11)%
787,168
Natural Gas and Oil (b)
28,724
21%
23,758
76,427
107%
36,865
Total generated
315,925
(23)%
411,839
773,294
(6)%
824,033
Total purchased
441,715
4%
426,104
829,347
(2)%
842,087
Total generated and purchased
757,640
(10)%
837,943
1,602,641
(4)%
1,666,120
____________________
(a) Decrease for the six months ended June 30, 2019 is due to planned outages at Neil Simpson II and Wygen III and unplanned outages at Wyodak Plant.
(b) Increase is primarily due to low natural gas prices and the ability to generate at a lower cost than to purchase generation on the open market for the six months ended June 30, 2019.