Business Overview and History

Black Hills Corporation (BKH) is a customer-focused energy solutions provider that has been serving over 1.3 million customers and 800 communities across an eight-state footprint for over 140 years. The company's operations are divided into two primary segments: Electric Utilities and Gas Utilities, with a Corporate and Other segment that includes unallocated corporate expenses and inter-segment eliminations.

Black Hills Corporation has a rich history dating back to the 1880s gold rush days in Deadwood, South Dakota. Founded in 1883, the company initially focused on providing electric service to the Deadwood area. Over the decades, Black Hills has demonstrated remarkable resilience, weathering various challenges including economic downturns and industry changes while remaining committed to serving its customers and communities.

A significant milestone in the company's history was its strategic decision to diversify into natural gas services in the 1980s. This move allowed Black Hills to offer a more comprehensive suite of energy solutions to its customers, paving the way for future growth and expansion. Throughout the 2000s, the company faced challenges from rising fuel and commodity costs, which put pressure on its margins. However, Black Hills successfully navigated this period by implementing cost-control measures and working collaboratively with regulators to recover prudent costs.

Throughout its history, Black Hills has maintained a steadfast focus on operational excellence, consistently ranking in the top quartile for reliability among its peers. This commitment to delivering safe and reliable energy has been a cornerstone of the company's success. Additionally, Black Hills has established a track record of stable and growing dividends, providing long-term value to its shareholders and demonstrating its financial stability.

Today, Black Hills Corporation operates as a holding company with various subsidiaries providing electric and natural gas services under the Black Hills Energy brand name. The company's ability to adapt and evolve over the years has positioned it as a leading provider of safe, reliable, and cost-effective energy solutions in the Rocky Mountain and Midwestern regions.

Financial Performance and Ratios

Black Hills Corporation has a strong financial profile, as evidenced by its consistent financial performance over the years. As of the latest reported quarter, the company's net income available for common stock was $175.0 million, or $2.52 per diluted share, for the nine months ended September 30, 2024. This represents a 4% year-over-year growth in earnings per share, excluding the impact of one-time events.

For the most recent fiscal year 2023, Black Hills Corporation reported revenues of $2.33 billion, net income of $262.2 million, operating cash flow of $944.4 million, and free cash flow of $388.8 million. In the most recent quarter (Q3 2024), the company reported revenues of $401.6 million, net income of $32.2 million, operating cash flow of $102.1 million, and free cash flow of -$86.0 million. Revenues decreased slightly year-over-year due to lower off-system sales, partially offset by new customer rates and rider recovery. Net income decreased year-over-year primarily due to higher operating expenses, unplanned generation outages, and a prior year benefit from insurance proceeds. Operating cash flow decreased year-over-year due to timing of payments and changes in working capital, while free cash flow turned negative due to higher capital expenditures.

The company's financial ratios also demonstrate its financial stability and prudent management. As of September 30, 2024, Black Hills had a debt-to-capitalization ratio of 55.3%, well within its target range of maintaining an investment-grade credit rating. The company's interest coverage ratio, a measure of its ability to meet interest payments, stood at 5.35, indicating a robust capacity to service its debt obligations. The debt-to-equity ratio was 1.24, reflecting the company's balanced capital structure.

Liquidity

Black Hills Corporation maintains a strong liquidity position, which is crucial for its ongoing operations and future growth initiatives. The company's liquidity is supported by its stable cash flows from its regulated utility operations, as well as its access to capital markets. As of the latest reported period, Black Hills had ample liquidity to fund its operations and capital expenditure programs, ensuring financial flexibility in various market conditions.

The company's cash position stood at $12.5 million, with an available credit line of $729.0 million under its $750.0 million Revolving Credit Facility. This facility includes an accordion feature that allows for increasing total commitments up to $1.0 billion, providing additional financial flexibility if needed.

Operational Highlights and Strategic Initiatives

Black Hills has a strong track record of operational excellence, as evidenced by its industry-leading electric reliability ratings. The company's electric utilities consistently rank in the top quartile for reliability, a testament to its commitment to providing safe and reliable service to its customers. This reliability has been crucial in attracting and serving growing data center and blockchain clients, a strategic focus area for the company.

To support its customer-centric growth strategy, Black Hills has been actively investing in its electric and gas infrastructure. Over the next five years, the company plans to invest approximately $4.3 billion in capital projects, including the Ready Wyoming electric transmission expansion project and various generation and renewable energy initiatives to meet customer demand and environmental regulations.

In addition to its infrastructure investments, Black Hills has also been proactive in its regulatory strategy. The company has successfully navigated the regulatory landscape, obtaining constructive rate case outcomes in several of its utility jurisdictions, including Arkansas, Iowa, and Colorado. These rate case approvals have enabled Black Hills to recover its investments and maintain its financial strength.

Segment Performance

Black Hills Corporation operates through two main segments: Electric Utilities and Gas Utilities.

The Electric Utilities segment includes the operations of Black Hills Colorado Electric, Black Hills Power, and Cheyenne Light, Fuel and Power Company (doing business as Black Hills Energy). This segment provides electric services to customers in Colorado, Montana, South Dakota, and Wyoming. For the nine months ended September 30, 2024, the Electric Utilities segment reported revenues of $659.8 million, up from $649.1 million in the prior year period. The increase was driven by new rates and rider recovery, as well as customer growth and usage. Operating income for this segment was $176.0 million, down from $190.7 million in the prior year period, due to higher operating expenses and unplanned generation outages, partially offset by the new rates and rider recovery. Capital expenditures for the Electric Utilities segment were $247.0 million, up from $155.6 million in the prior year period, primarily driven by the Ready Wyoming transmission expansion project.

The Gas Utilities segment includes the operations of Black Hills Energy's natural gas distribution companies in Arkansas, Colorado, Iowa, Kansas, Nebraska, and Wyoming. For the nine months ended September 30, 2024, the Gas Utilities segment reported revenues of $884.2 million, down from $1.10 billion in the prior year period. The decrease was primarily due to lower natural gas commodity prices. Operating income for this segment was $164.6 million, up from $147.7 million in the prior year period, driven by new rates and rider recovery, as well as customer growth and usage. Capital expenditures for the Gas Utilities segment were $308.0 million, up from $260.9 million in the prior year period, as the company continues to invest in its natural gas distribution infrastructure.

Geographic Markets

Black Hills Corporation operates primarily in the United States, serving customers in Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. This geographic diversification helps to mitigate regional economic risks and provides a broad base for future growth opportunities.

Guidance and Outlook

Black Hills Corporation has reaffirmed its 2024 earnings guidance range of $3.80 to $4.00 per share, despite facing some unexpected challenges during the year, such as mild weather, unplanned generation outages, and increased insurance costs. The company's strong margin growth and prudent expense management have allowed it to mitigate these headwinds and remain on track to deliver on its financial objectives.

Looking ahead, Black Hills remains confident in its ability to achieve its long-term 4% to 6% compounded annual earnings growth target, driven by its strategic growth initiatives, including serving the expanding data center and blockchain markets, as well as its continued focus on operational excellence and cost management.

For their 5-year capital investment plan from 2024-2028, Black Hills expects to invest a total of $4.3 billion, with $1.3 billion forecast for 2026 including generation investments. The company plans to provide its 2025 earnings guidance and an updated capital forecast through 2029 on its Q4 2024 earnings call in February.

Risks and Challenges

Like any utility company, Black Hills faces various risks and challenges, including regulatory uncertainty, commodity price fluctuations, and weather-related impacts on energy demand. The company's ability to navigate these challenges and maintain its strong financial and operational performance will be crucial to its long-term success.

Additionally, the company's growth initiatives, particularly in the data center and blockchain sectors, expose it to technological and competitive risks. Black Hills must continue to innovate and adapt its service offerings to meet the evolving needs of these emerging customer segments.

Conclusion

Black Hills Corporation has a long and storied history as a reliable energy provider, serving its customers and communities with a steadfast commitment to safety, reliability, and cost-effectiveness. The company's diversified operations, prudent financial management, and strategic focus on growth initiatives position it well to navigate the challenges of the evolving energy landscape. As Black Hills continues to execute on its customer-centric strategy, investors can expect the company to remain a consistent performer in the utility sector.