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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, 2022
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.
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| Large Accelerated Filer | x | | Accelerated Filer | ☐ | |
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| Non-accelerated Filer | ☐ | | Smaller Reporting Company | ☐ | |
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| | | | 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 ☒
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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 29, 2022 | |
Common stock, $1.00 par value | 64,833,223 | | shares | |
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TABLE OF CONTENTS |
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TABLE OF CONTENTS |
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GLOSSARY OF TERMS AND ABBREVIATIONS
The following terms and abbreviations appear in the text of this report and have the definitions described below:
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AFUDC | Allowance for Funds Used During Construction |
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AOCI | Accumulated Other Comprehensive Income (Loss) |
APSC | Arkansas Public Service Commission |
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). |
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ASC | Accounting Standards Codification |
ASU | Accounting Standards Update issued by the FASB |
ATM | At-the-market equity offering program |
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Availability | The availability factor of a power plant is the percentage of the time that it is available to provide energy. |
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BHC | Black Hills Corporation; the Company |
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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 |
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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 |
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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 |
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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). Also known as Wyoming Electric. |
Chief Operating Decision Maker (CODM) | Chief Executive Officer |
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. |
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Colorado Electric | Black Hills Colorado Electric, LLC, a direct, wholly-owned subsidiary of Black Hills Utility Holdings, providing electric service 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 participate 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 (CDD) | 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. |
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CPCN | Certificate of Public Convenience and Necessity |
CP Program | Commercial Paper Program |
CPUC | Colorado Public Utilities Commission |
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Dth | Dekatherm. A unit of energy equal to 10 therms or approximately one million British thermal units (MMBtu) |
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FASB | Financial Accounting Standards Board |
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Fitch | Fitch Ratings Inc. |
GAAP | Accounting principles generally accepted in the United States of America |
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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 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. |
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 |
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IRS | United States Internal Revenue Service |
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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). |
KCC | Kansas Corporation Commission |
kV | Kilovolt |
LIBOR | London Interbank Offered Rate |
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MEAN | Municipal Energy Agency of Nebraska |
MMBtu | Million British thermal units |
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Moody’s | Moody’s Investors Service, Inc. |
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MW | Megawatts |
MWh | Megawatt-hours |
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). |
Neil Simpson II | A mine-mouth, coal-fired power plant owned and operated by South Dakota Electric with a total capacity of 90 MW located at our Gillette, Wyoming energy complex. |
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OCI | Other Comprehensive Income |
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PPA | Power Purchase Agreement |
PRPA | Platte River Power Authority |
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Pueblo Airport Generation | The 420 MW combined cycle gas-fired power generating 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. |
Ready Wyoming | A 260-mile, multi-phase transmission expansion project in Wyoming. This transmission project will serve the growing needs of customers by enhancing resiliency of Wyoming Electric’s overall electric system and expanding access to power markets and renewable resources. The project will help Wyoming Electric maintain top-quartile reliability and enable economic development in the Cheyenne, Wyoming region. |
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Renewable Ready | Voluntary renewable energy subscription program for large commercial, industrial and governmental agency customers in South Dakota and Wyoming. |
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. |
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SEC | United States Securities and Exchange Commission |
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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. |
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). |
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SPP | Southwest Power Pool |
TCJA | Tax Cuts and Jobs Act |
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 |
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. |
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WPSC | Wyoming Public Service Commission |
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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. |
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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). |
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 2021 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:
•Our ability to obtain adequate cost recovery for our utility operations through regulatory proceedings and favorable rulings on periodic applications to recover costs for capital additions, plant retirements and decommissioning, fuel, transmission, purchased power, and other operating costs and the timing in which new rates would go into effect;
•Our ability to complete our capital program in a cost-effective and timely manner;
•Our ability to execute on our strategy;
•Our ability to successfully execute our financing plans;
•Our ability to achieve our greenhouse gas emissions intensity reduction goals;
•Board of Directors’ approval of any future quarterly dividends;
•The impact of future governmental regulation;
•Our ability to overcome the impacts of supply chain disruptions on availability and cost of materials;
•The effects of inflation and volatile energy prices; and
•Other factors discussed from time to time in our filings with the SEC.
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.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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(unaudited) | | Three Months Ended March 31, |
| | | 2022 | 2021 |
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Revenue | | | $ | 823,570 | | $ | 633,432 | |
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Operating expenses: | | | | |
Fuel, purchased power and cost of natural gas sold | | | 436,926 | | 293,147 | |
Operations and maintenance | | | 136,132 | | 129,679 | |
Depreciation, depletion and amortization | | | 60,463 | | 57,269 | |
Taxes - property and production | | | 16,696 | | 15,022 | |
Total operating expenses | | | 650,217 | | 495,117 | |
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Operating income | | | 173,353 | | 138,315 | |
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Other income (expense): | | | | |
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Interest expense incurred net of amounts capitalized (including amortization of debt issuance costs, premiums and discounts) | | | (38,821) | | (37,825) | |
Interest income | | | 276 | | 225 | |
Other income, net | | | 704 | | 266 | |
Total other income (expense) | | | (37,841) | | (37,334) | |
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Income before income taxes | | | 135,512 | | 100,981 | |
Income tax expense | | | (14,488) | | (494) | |
Net income | | | 121,024 | | 100,487 | |
Net income attributable to non-controlling interest | | | (3,498) | | (4,171) | |
Net income available for common stock | | | $ | 117,526 | | $ | 96,316 | |
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Earnings per share of common stock: | | | | |
Earnings per share, Basic | | | $ | 1.82 | | $ | 1.54 | |
Earnings per share, Diluted | | | $ | 1.82 | | $ | 1.54 | |
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Weighted average common shares outstanding: | | | | |
Basic | | | 64,565 | | 62,633 | |
Diluted | | | 64,721 | | 62,691 | |
BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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(unaudited) | | Three Months Ended March 31, |
| | | 2022 | 2021 |
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Net income | | | $ | 121,024 | | $ | 100,487 | |
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Other comprehensive income (loss), net of tax: | | | | |
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Reclassification adjustments of benefit plan liability - prior service cost (net of tax of $6 and $9, respectively) | | | (18) | | (16) | |
Reclassification adjustments of benefit plan liability - net loss (net of tax of $(45) and $(217), respectively) | | | 143 | | 381 | |
Derivative instruments designated as cash flow hedges: | | | | |
Reclassification of net realized (gains) losses on settled/amortized interest rate swaps (net of tax of $(177) and $(190), respectively) | | | 536 | | 523 | |
Net unrealized gains (losses) on commodity derivatives (net of tax of $(340) and $(35), respectively) | | | 1,047 | | 107 | |
Reclassification of net realized (gains) losses on settled commodity derivatives (net of tax of $552 and $(8), respectively) | | | (1,702) | | 23 | |
Other comprehensive income, net of tax | | | 6 | | 1,018 | |
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Comprehensive income | | | 121,030 | | 101,505 | |
Less: comprehensive income attributable to non-controlling interest | | | (3,498) | | (4,171) | |
Comprehensive income available for common stock | | | $ | 117,532 | | $ | 97,334 | |
See Note 9 for additional disclosures.
BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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(unaudited) | As of |
| March 31, 2022 | | December 31, 2021 |
| (in thousands) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 16,330 | | | $ | 8,921 | |
Restricted cash and equivalents | 5,017 | | | 4,889 | |
Accounts receivable, net | 383,790 | | | 321,652 | |
Materials, supplies and fuel | 108,232 | | | 150,979 | |
Derivative assets, current | 7,382 | | | 4,373 | |
Income tax receivable, net | 17,991 | | | 18,017 | |
Regulatory assets, current | 265,496 | | | 270,290 | |
Other current assets | 45,070 | | | 29,012 | |
Total current assets | 849,308 | | | 808,133 | |
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Property, plant and equipment | 7,927,840 | | | 7,856,573 | |
Less: accumulated depreciation and depletion | (1,454,425) | | | (1,407,397) | |
Total property, plant and equipment, net | 6,473,415 | | | 6,449,176 | |
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Other assets: | | | |
Goodwill | 1,299,454 | | | 1,299,454 | |
Intangible assets, net | 10,474 | | | 10,770 | |
Regulatory assets, non-current | 457,848 | | | 526,309 | |
Other assets, non-current | 40,155 | | | 38,054 | |
Total other assets, non-current | 1,807,931 | | | 1,874,587 | |
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TOTAL ASSETS | $ | 9,130,654 | | | $ | 9,131,896 | |
BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
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(unaudited) | As of |
| March 31, 2022 | | December 31, 2021 |
| (in thousands, except share amounts) |
LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 173,102 | | | $ | 217,761 | |
Accrued liabilities | 227,209 | | | 244,759 | |
Derivative liabilities, current | 191 | | | 1,439 | |
Regulatory liabilities, current | 52,742 | | | 17,574 | |
Notes payable | 341,480 | | | 420,180 | |
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Total current liabilities | 794,724 | | | 901,713 | |
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Long-term debt, net of current maturities | 4,128,291 | | | 4,126,923 | |
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Deferred credits and other liabilities: | | | |
Deferred income tax liabilities, net | 490,384 | | | 465,388 | |
Regulatory liabilities, non-current | 482,442 | | | 485,377 | |
Benefit plan liabilities | 123,111 | | | 123,925 | |
Other deferred credits and other liabilities | 140,680 | | | 141,447 | |
Total deferred credits and other liabilities | 1,236,617 | | | 1,216,137 | |
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Commitments, contingencies and guarantees (Note 3) | | | |
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Equity: | | | |
Stockholders’ equity — | | | |
Common stock $1 par value; 100,000,000 shares authorized; issued 64,849,227 and 64,793,095 shares, respectively | 64,849 | | | 64,793 | |
Additional paid-in capital | 1,786,980 | | | 1,783,436 | |
Retained earnings | 1,041,451 | | | 962,458 | |
Treasury stock, at cost – 19,685 and 54,078 shares, respectively | (1,287) | | | (3,509) | |
Accumulated other comprehensive income (loss) | (20,078) | | | (20,084) | |
Total stockholders’ equity | 2,871,915 | | | 2,787,094 | |
Non-controlling interest | 99,107 | | | 100,029 | |
Total equity | 2,971,022 | | | 2,887,123 | |
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TOTAL LIABILITIES AND TOTAL EQUITY | $ | 9,130,654 | | | $ | 9,131,896 | |
BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(unaudited) | Three Months Ended March 31, |
| 2022 | 2021 |
Operating activities: | (in thousands) |
Net income | $ | 121,024 | | $ | 100,487 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | |
Depreciation, depletion and amortization | 60,463 | | 57,269 | |
Deferred financing cost amortization | 2,475 | | 2,214 | |
Stock compensation | 3,638 | | 3,257 | |
Deferred income taxes | 14,462 | | 153 | |
Employee benefit plans | 1,173 | | 2,304 | |
Other adjustments, net | 5,337 | | 6,151 | |
Changes in certain operating assets and liabilities: | | |
Materials, supplies and fuel | 34,995 | | 15,932 | |
Accounts receivable and other current assets | (71,241) | | (11,599) | |
Accounts payable and other current liabilities | (8,422) | | (23,602) | |
Regulatory assets | 98,528 | | (533,006) | |
Regulatory liabilities | — | | (5,291) | |
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Other operating activities, net | 1,689 | | (355) | |
Net cash provided by (used in) operating activities | 264,121 | | (386,086) | |
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Investing activities: | | |
Property, plant and equipment additions | (136,779) | | (146,302) | |
Other investing activities | (1,065) | | 78 | |
Net cash (used in) investing activities | (137,844) | | (146,224) | |
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Financing activities: | | |
Dividends paid on common stock | (38,533) | | (35,514) | |
Common stock issued | 3,791 | | — | |
Term loan - borrowings | — | | 800,000 | |
Term loan - repayments | — | | (200,000) | |
Net borrowings (payments) of Revolving Credit Facility and CP Program | (78,700) | | (18,170) | |
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Long-term debt - repayments | — | | (1,436) | |
Distributions to non-controlling interest | (4,420) | | (4,644) | |
Other financing activities | (878) | | (740) | |
Net cash provided by (used in) financing activities | (118,740) | | 539,496 | |
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Net change in cash, restricted cash and cash equivalents | 7,537 | | 7,186 | |
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Cash, restricted cash and cash equivalents at beginning of period | 13,810 | | 10,739 | |
Cash, restricted cash and cash equivalents at end of period | $ | 21,347 | | $ | 17,925 | |
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Supplemental cash flow information: | | |
Cash (paid) refunded during the period: | | |
Interest, net of amounts capitalized | $ | (23,605) | | $ | (21,232) | |
Income taxes | — | | 990 | |
Non-cash investing and financing activities: | | |
Accrued property, plant and equipment purchases at March 31 | 39,559 | | 51,914 | |
BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
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(unaudited) | Common Stock | Treasury Stock | | | | | |
(in thousands except share amounts) | Shares | Value | Shares | Value | Additional Paid in Capital | Retained Earnings | AOCI | Non-controlling Interest | Total |
December 31, 2021 | 64,793,095 | | $ | 64,793 | | 54,078 | | $ | (3,509) | | $ | 1,783,436 | | $ | 962,458 | | $ | (20,084) | | $ | 100,029 | | $ | 2,887,123 | |
Net income | — | | — | | — | | — | | — | | 117,526 | | — | | 3,498 | | 121,024 | |
Other comprehensive income, net of tax | — | | — | | — | | — | | — | | — | | 6 | | — | | 6 | |
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Dividends on common stock ($0.595 per share) | — | | — | | — | | — | | — | | (38,533) | | — | | — | | (38,533) | |
Share-based compensation | 425 | | — | | (34,393) | | 2,222 | | (191) | | — | | — | | — | | 2,031 | |
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Issuance of common stock | 55,707 | | 56 | | — | | — | | 3,776 | | — | | — | | — | | 3,832 | |
Issuance costs | — | | — | | — | | — | | (41) | | — | | — | | — | | (41) | |
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Distributions to non-controlling interest | — | | — | | — | | — | | — | | — | | — | | (4,420) | | (4,420) | |
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 | |
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(unaudited) | Common Stock | Treasury Stock | | | | | |
(in thousands except share amounts) | Shares | Value | Shares | Value | Additional Paid in Capital | Retained Earnings | AOCI | Non-controlling Interest | Total |
December 31, 2020 | 62,827,179 | | $ | 62,827 | | 32,492 | | $ | (2,119) | | $ | 1,657,285 | | $ | 870,738 | | $ | (27,346) | | $ | 101,262 | | $ | 2,662,647 | |
Net income | — | | — | | — | | — | | — | | 96,316 | | — | | 4,171 | | 100,487 | |
Other comprehensive income, net of tax | — | | — | | — | | — | | — | | — | | 1,018 | | — | | 1,018 | |
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Dividends on common stock ($0.565 per share) | — | | — | | — | | — | | — | | (35,514) | | — | | — | | (35,514) | |
Share-based compensation | 82,794 | | 83 | | 7,448 | | (445) | | 1,672 | | — | | — | | — | | 1,310 | |
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Other | — | | — | | — | | — | | — | | (2) | | — | | — | | (2) | |
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Distributions to non-controlling interest | — | | — | | — | | — | | — | | — | | — | | (4,644) | | (4,644) | |
March 31, 2021 | 62,909,973 | | $ | 62,910 | | 39,940 | | $ | (2,564) | | $ | 1,658,957 | | $ | 931,538 | | $ | (26,328) | | $ | 100,789 | | $ | 2,725,302 | |
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BLACK HILLS CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Reference is made to Notes to Consolidated Financial Statements
included in the Company’s 2021 Annual Report on Form 10-K)
(1) Management’s Statement
The unaudited Condensed 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 Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and the notes included in our 2021 Annual Report on Form 10-K.
Segment Reporting
Our reportable segments are based on our method of internal reporting, which is generally segregated by differences in products and services. All of our operations and assets are located within the United States. We conduct our operations through the Electric Utilities and Gas Utilities segments. 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.
For further information regarding our segment reporting, see Note 12.
Use of Estimates and Basis of Presentation
The information furnished in the accompanying Condensed 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, 2022, December 31, 2021 and March 31, 2021 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. 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, 2022. We are currently evaluating whether we will apply the optional guidance as we assess the impact of the discontinuance of LIBOR on our current arrangements but do not expect it to have a material impact on our financial position, results of operations and cash flows.
(2) Regulatory Matters
We had the following regulatory assets and liabilities (in thousands):
| | | | | | | | |
| As of | As of |
| March 31, 2022 | December 31, 2021 |
Regulatory assets | | |
Winter Storm Uri (a) | $ | 438,675 | | $ | 509,025 | |
Deferred energy and fuel cost adjustments (b) | 67,068 | | 59,973 | |
Deferred gas cost adjustments (b) | 1,917 | | 9,488 | |
Gas price derivatives (b) | 220 | | 2,584 | |
Deferred taxes on AFUDC (b) | 7,420 | | 7,457 | |
Employee benefit plans and related deferred taxes (c) | 87,947 | | 88,923 | |
Environmental (b) | 1,375 | | 1,385 | |
| | |
Loss on reacquired debt (b) | 20,561 | | 21,011 | |
| | |
Deferred taxes on flow through accounting (b) | 69,387 | | 63,243 | |
Decommissioning costs (b) | 5,339 | | 5,961 | |
Other regulatory assets (b) | 23,435 | | 27,549 | |
Total regulatory assets | 723,344 | | 796,599 | |
Less current regulatory assets | (265,496) | | (270,290) | |
Regulatory assets, non-current | $ | 457,848 | | $ | 526,309 | |
| | |
Regulatory liabilities | | |
Deferred energy and gas costs (b) | $ | 38,343 | | $ | 6,113 | |
| | |
Employee benefit plan costs and related deferred taxes (c) | 31,943 | | 32,241 | |
Cost of removal (b) | 181,690 | | 179,976 | |
| | |
Excess deferred income taxes (c) | 259,856 | | 264,042 | |
Other regulatory liabilities (c) | 23,352 | | 20,579 | |
Total regulatory liabilities | 535,184 | | 502,951 | |
Less current regulatory liabilities | (52,742) | | (17,574) | |
Regulatory liabilities, non-current | $ | 482,442 | | $ | 485,377 | |
__________
(a) Timing of Winter Storm Uri incremental cost recovery and associated carrying costs vary by jurisdiction and some jurisdictions are still subject to pending applications with the respective utility commission. See further information below.
(b) Recovery of costs, but we are not 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 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 2021 Annual Report on Form 10-K.
Winter Storm Uri
In February 2021, a prolonged period of historic cold temperatures across the central United States, which covered all of our Utilities’ service territories, 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 of Winter Storm Uri, we incurred significant incremental fuel, purchased power and natural gas costs.
Our Utilities submitted Winter Storm Uri cost recovery applications in our state jurisdictions seeking to recover $546 million of these incremental costs through separate tracking mechanisms over a weighted-average recovery period of 3.5 years. These incremental cost estimates are subject to adjustments as final decisions are issued by the respective utility commissions. In these applications, we seek approval to recover carrying costs. For the three months ended March 31, 2022 and 2021, $2.3 million and $0, respectively, of carrying costs were accrued and recorded to a regulatory asset.
On January 27, 2022, Kansas Gas received approval from the KCC for their Winter Storm Uri cost recovery settlement with final rates implemented in February 2022. In March 2022, Colorado Electric and Colorado Gas received approval from the CPUC for their respective Winter Storm Uri cost recovery settlements with final rates implemented in April 2022.
To date, Colorado Electric, Colorado Gas, Iowa Gas, Kansas Gas, Nebraska Gas and South Dakota Electric received commission approval of their Winter Storm Uri cost recovery applications. Additionally, Arkansas Gas and Wyoming Gas received approval for interim cost recovery subject to a final decision on carrying costs and recovery periods at a later date. For the three months ended March 31, 2022, our Utilities collected $73 million of Winter Storm Uri incremental costs and carrying costs from customers. As of March 31, 2022, we estimate that our remaining Winter Storm Uri regulatory asset has a weighted-average recovery period of 3.1 years.
TCJA
As part of Kansas Gas’s 2021 rate review settlement agreement, Kansas Gas will deliver $3.0 million of TCJA and state tax reform benefits to customers, annually, for three years starting in 2022 (approximately $9.1 million of total benefits expected to be delivered). For the three months ended March 31, 2022, Kansas Gas delivered $0.8 million of TCJA-related bill credits to customers.
These bill credits, which resulted in a reduction of revenue, were offset by a reduction in income tax expense and resulted in a minimal impact to Net income for the three months ended March 31, 2022.
Arkansas Gas
On December 10, 2021, Arkansas Gas filed a rate review with the APSC seeking recovery of significant infrastructure investments in its 7,200-mile natural gas pipeline system. The rate review requests $22 million in new annual revenue with a capital structure of 50.9% equity and 49.1% debt and a return on equity of 10.2%. The request seeks to finalize rates in the fourth quarter of 2022.
(3) Commitments, Contingencies and Guarantees
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 2021 Annual Report on Form 10-K except for those described below.
Power Sales Agreement
On May 3, 2022, South Dakota Electric entered into an agreement with MDU to provide MDU capacity and energy up to a maximum of 50 MW in excess of Wygen III ownership. This agreement, which has similar terms and conditions as South Dakota Electric’s existing agreement with MDU expiring on December 31, 2023, is effective on January 1, 2024 and will expire on December 31, 2028.
GT Resources, LLC v. Black Hills Corporation, Case No. 2020CV30751 (U.S. District Court for the City and County of Denver, Colorado)
On April 13, 2022, a jury awarded $41 million for claims made by GT Resources, LLC (“GTR”) against BHC and two of its subsidiaries (Black Hills Exploration and Production, Inc. and Black 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 in Costa Rica which was acquired by a BHC subsidiary in 2003. GTR retained rights to receive a royalty interest on any hydrocarbon production from the concession upon the occurrence of contingent events. GTR contended that BHC and its subsidiaries failed to adequately pursue the opportunity and failed to transfer the concession to GTR. We believe we have meritorious defenses to the verdict and intend to appeal the verdict. At this time, we believe that the liability related to this matter, if any, is not reasonably estimable.
Power Purchase Agreement
On February 19, 2021, Colorado Electric entered into an agreement with TC Colorado Solar, LLC (TC Solar) to purchase up to 200 MW of renewable energy upon construction of a new solar facility, to be owned by TC Solar. This agreement relates to a new solar facility to be constructed and would expire 15 years after construction completion. On January 31, 2022, TC Solar provided notice of its intent to terminate the PPA. We disputed TC Solar's right to termination and, pursuant to the agreement, entered resolution negotiations to amend certain contract terms with TC Solar, which are ongoing.
Transmission Service Agreements
On January 1, 2022, Colorado Electric entered into a firm point-to-point transmission service agreement that provides Tri-State Generation and Transmission Association Inc. with a maximum of 58 MW of transmission capacity. This agreement expires December 31, 2024.
On January 1, 2022, South Dakota Electric entered into a firm point-to-point transmission service agreement that provides MEAN with a maximum of 20 MW of transmission capacity. This agreement expires December 31, 2023.
(4) Revenue
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, 2022 and 2021. Sales tax and other similar taxes are excluded from revenues. | | | | | | | | | | | | | | |
Three Months Ended March 31, 2022 | Electric Utilities | Gas Utilities | Inter-company Revenues | Total |
Customer types: | (in thousands) |
Retail | $ | 172,806 | | $ | 561,013 | | $ | — | | $ | 733,819 | |
Transportation | — | | 49,523 | | (99) | | 49,424 | |
Wholesale | 10,275 | | — | | — | | 10,275 | |
Market - off-system sales | 7,154 | | 238 | | — | | 7,392 | |
Transmission/Other | 15,433 | | 9,575 | | (4,149) | | 20,859 | |
Revenue from contracts with customers | $ | 205,668 | | $ | 620,349 | | $ | (4,248) | | $ | 821,769 | |
Other revenues | 870 | | 1,043 | | (112) | | 1,801 | |
Total revenues | $ | 206,538 | | $ | 621,392 | | $ | (4,360) | | $ | 823,570 | |
| | | | |
Timing of revenue recognition: | | | | |
Services transferred at a point in time | $ | 7,113 | | $ | — | | $ | — | | $ | 7,113 | |
Services transferred over time | 198,555 | | 620,349 | | (4,248) | | 814,656 | |
Revenue from contracts with customers | $ | 205,668 | | $ | 620,349 | | $ | (4,248) | | $ | 821,769 | |
| | | | |
| | | | | | | | | | | | | | |
Three Months Ended March 31, 2021 | Electric Utilities | Gas Utilities | Inter-company Revenues | Total |
Customer Types: | (in thousands) |
Retail | $ | 204,280 | | $ | 341,605 | | $ | — | | $ | 545,885 | |
Transportation | — | | 47,951 | | (110) | | 47,841 | |
Wholesale | 11,359 | | — | | — | | 11,359 | |
Market - off-system sales | 4,772 | | 73 | | — | | 4,845 | |
Transmission/Other | 14,186 | | 10,390 | | (4,289) | | 20,287 | |
Revenue from contracts with customers | $ | 234,597 | | $ | 400,019 | | $ | (4,399) | | $ | 630,217 | |
Other revenues | 807 | | 2,500 | | (92) | | 3,215 | |
Total Revenues | $ | 235,404 | | $ | 402,519 | | $ | (4,491) | | $ | 633,432 | |
| | | | |
Timing of Revenue Recognition: | | | | |
Services transferred at a point in time | $ | 6,976 | | $ | — | | $ | — | | $ | 6,976 | |
Services transferred over time | 227,621 | | 400,019 | | (4,399) | | 623,241 | |
Revenue from contracts with customers | $ | 234,597 | | $ | 400,019 | | $ | (4,399) | | $ | 630,217 | |
| | | | |
(5) Financing
Short-term Debt
We had the following Notes payable outstanding in the accompanying Condensed Consolidated Balance Sheets (in thousands) as of:
| | | | | | | | | | | | | | |
| March 31, 2022 | December 31, 2021 |
| Balance Outstanding | Letters of Credit (a) | Balance Outstanding | Letters of Credit (a) |
| | | | |
Revolving Credit Facility | — | | 16,855 | | — | | 27,209 | |
CP Program | 341,480 | | — | | 420,180 | | — | |
Total Notes payable | $ | 341,480 | | $ | 16,855 | | $ | 420,180 | | $ | 27,209 | |
__________(a) Letters of credit are off-balance sheet commitments that reduce the borrowing capacity available on our corporate Revolving Credit Facility.
Revolving Credit Facility and CP Program
Our net short-term repayments related to our Revolving Credit Facility and CP Program during the three months ended March 31, 2022 were $79 million. The weighted average interest rate on short-term borrowings related to our Revolving Credit Facility and CP Program at March 31, 2022 was 0.79%.
Debt Covenants
Revolving Credit Facility
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, 2022 as shown below:
| | | | | | | | | | | | | | |
| As of March 31, 2022 | | Covenant Requirement |
Consolidated Indebtedness to Capitalization Ratio | 61.0% | | Less than | 65% |
Wyoming Electric
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, 2021, we were in compliance with these financial covenants.
Equity
At-the-Market Equity Offering Program
During the three months ended March 31, 2022, we issued a total of 55,707 shares of common stock under the ATM for proceeds of $3.8 million. During the three months ended March 31, 2021, we did not issue any shares of common stock under the ATM.
(6) Earnings Per Share
A reconciliation of share amounts used to compute earnings per share in the accompanying Condensed Consolidated Statements of Income was as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | 2022 | 2021 |
| | | | | |
Net income available for common stock | | | | $ | 117,526 | | $ | 96,316 | |
| | | | | |
Weighted average shares - basic | | | | 64,565 | | 62,633 | |
Dilutive effect of: | | | | | |
Equity compensation | | | | 156 | | 58 | |
Weighted average shares - diluted | | | | 64,721 | | 62,691 | |
| | | | | |
Earnings per share of common stock: | | | | | |
Earnings per share, Basic | | | | $ | 1.82 | | $ | 1.54 | |
Earnings per share, Diluted | | | | $ | 1.82 | | $ | 1.54 | |
The following securities were excluded from the diluted earnings per share computation because of their anti-dilutive nature (in thousands):
| | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | 2022 | 2021 |
| | | | | |
Equity compensation | | | | — | | 14 | |
Restricted stock | | | | — | | 19 | |
| | | | | |
Anti-dilutive shares | | | | — | | 33 | |
(7) Risk Management and Derivatives
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.
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:
•Commodity price risk associated with our retail natural gas and wholesale electric power marketing activities and our fuel procurement for several of our gas-fired generation assets, which include market fluctuations due to unpredictable factors such as the COVID-19 pandemic, weather (Winter Storm Uri), market speculation, inflation, pipeline constraints, and other factors that may impact natural gas and electric supply and demand; and
•Interest rate risk associated with future debt, including reduced access to liquidity during periods of extreme capital markets volatility, such as the 2008 financial crisis and the COVID-19 pandemic.
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 Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Income and Condensed 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 have entered 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 Condensed 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 Condensed 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 Condensed 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 Condensed Consolidated Statements of Income.
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 2022 through December 2024. 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 Condensed 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 | | |
| Notional Amounts (MMBtus) |