UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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| |
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the quarterly period ended March 31, 2017 |
| OR | |
| o | 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 |
| 625 Ninth Street |
| Rapid City, South Dakota 57701 |
| 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.
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, 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).
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 | o | | Accelerated filer | o |
| | | | | |
| Non-accelerated filer | x | (Do not check if a smaller reporting company) |
| | | | | |
| | | | Smaller reporting company | o |
| | | | | |
| | | | Emerging growth company | o |
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).
As of April 30, 2017, 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.
TABLE OF CONTENTS
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| | |
| | | Page |
| | GLOSSARY OF TERMS AND ABBREVIATIONS | |
| | | |
| PART 1. | FINANCIAL INFORMATION | |
| | | |
| Item 1. | Financial Statements | |
| | | |
| | Condensed Statements of Income and Comprehensive Income - unaudited | |
| | Three Months Ended March 31, 2017 and 2016 | |
| | | |
| | Condensed Balance Sheets - unaudited | |
| | March 31, 2017 and December 31, 2016 | |
| | | |
| | Condensed Statements of Cash Flows - unaudited | |
| | Three Months Ended March 31, 2017 and 2016 | |
| | | |
| | Notes to Condensed Financial Statements - unaudited | |
| | | |
| Item 2. | Managements’ Discussion and Analysis of Financial Condition and Results of Operations | |
| | | |
| Item 4. | Controls and Procedures | |
| | | |
| PART II. | OTHER INFORMATION | |
| | | |
| Item 1. | Legal Proceedings | |
| | | |
| Item 1A. | Risk Factors | |
| | | |
| Item 6. | Exhibits | |
| | | |
| | Signatures | |
| | | |
| | Exhibit Index | |
GLOSSARY OF TERMS AND ABBREVIATIONS
The following terms and abbreviations appear in the text of this report and have the definitions described below:
|
| |
| AFUDC | Allowance for Funds Used During Construction |
| 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 Utility Holdings | Black Hills Utility Holdings, Inc. a direct, wholly-owned subsidiary of Black Hills Corporation (doing business as Black Hills Energy) |
| 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) |
| 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 | 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 over a 30-year average. |
| kV | Kilovolt |
| LIBOR | London Interbank Offered Rate |
| Moody’s | Moody’s Investors Service, Inc. |
| MW | Megawatts |
| SEC | U. S. Securities and Exchange Commission |
| Silver Sage | Silver Sage Windpower, LLC, a subsidiary of Duke Energy Generation Services |
| S&P | Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. |
| WRDC | Wyodak Resources Development Corp., an indirect, wholly-owned subsidiary of BHC |
BLACK HILLS POWER, INC.
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
| | | | | | | |
| | Three Months Ended March 31, |
| (unaudited) | 2017 | | 2016 |
| | (in thousands) |
| Revenue | $ | 73,794 |
| | $ | 68,642 |
|
| | | | |
| Operating expenses: | | | |
| Fuel and purchased power | 23,149 |
| | 20,730 |
|
| Operations and maintenance | 16,954 |
| | 17,031 |
|
| Depreciation and amortization | 8,694 |
| | 8,612 |
|
| Taxes - property | 1,621 |
| | 1,489 |
|
| Total operating expenses | 50,418 |
| | 47,862 |
|
| | | | |
| Operating income | 23,376 |
| | 20,780 |
|
| | | | |
| Other income (expense): | | | |
| Interest expense | (6,336 | ) | | (5,454 | ) |
| AFUDC - borrowed | 192 |
| | 223 |
|
| Interest income | 707 |
| | 202 |
|
| AFUDC - equity | 471 |
| | 423 |
|
| Other income (expense), net | (53 | ) | | 74 |
|
| Total other income (expense) | (5,019 | ) | | (4,532 | ) |
| | | | |
| Income from continuing operations before income taxes | 18,357 |
| | 16,248 |
|
| Income tax expense | (5,787 | ) | | (5,062 | ) |
| Net income | 12,570 |
| | 11,186 |
|
| | | | |
| Other comprehensive income (loss): | | | |
| Reclassification adjustments of cash flow hedges settled and included in net income (net of tax (expense) benefit of $(6) and $(6) for the three months ended March 31, 2017 and 2016, respectively) | 10 |
| | 10 |
|
| Reclassification adjustment of benefit plan liability - net gain (loss) (net of tax (expense) benefit of $(8) and $(7) for the three months ended March 31, 2017 and 2016, respectively) | 14 |
| | 14 |
|
| Other comprehensive income | 24 |
| | 24 |
|
| | | | |
| Comprehensive income | $ | 12,594 |
| | $ | 11,210 |
|
The accompanying Notes to Condensed Financial Statements are an integral part of these Condensed Financial Statements.
BLACK HILLS POWER, INC.
CONDENSED BALANCE SHEETS
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| | | | | | |
| (unaudited) | March 31, 2017 | December 31, 2016 |
| | (in thousands) |
| ASSETS | | |
| Current assets: | | |
| Cash and cash equivalents | $ | 1,127 |
| $ | 234 |
|
| Receivables - customers, net | 27,457 |
| 30,614 |
|
| Receivables - affiliates | 5,390 |
| 9,526 |
|
| Other receivables, net | 420 |
| 351 |
|
| Money pool notes receivable, net | 32,949 |
| 28,409 |
|
| Materials, supplies and fuel | 23,244 |
| 22,389 |
|
| Regulatory assets, current | 20,536 |
| 18,119 |
|
| Other, current assets | 3,286 |
| 3,876 |
|
| Total current assets | 114,409 |
| 113,518 |
|
| | | |
| Investments | 4,849 |
| 4,841 |
|
| | | |
| Property, plant and equipment | 1,254,710 |
| 1,236,387 |
|
| Less accumulated depreciation and amortization | (342,400 | ) | (338,828 | ) |
| Total property, plant and equipment, net | 912,310 |
| 897,559 |
|
| | | |
| Other assets: | | |
| Regulatory assets, non-current | 73,445 |
| 74,015 |
|
| Other, non-current assets | 3,545 |
| 3,816 |
|
| Total other assets | 76,990 |
| 77,831 |
|
| TOTAL ASSETS | $ | 1,108,558 |
| $ | 1,093,749 |
|
The accompanying Notes to Condensed Financial Statements are an integral part of these Condensed Financial Statements.
BLACK HILLS POWER, INC.
CONDENSED BALANCE SHEETS
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| | | | | | |
| (unaudited) | March 31, 2017 | December 31, 2016 |
| | (in thousands, except common stock par value and share amounts) |
| LIABILITIES AND STOCKHOLDER’S EQUITY | | |
| Current liabilities: | | |
| Accounts payable | $ | 16,809 |
| $ | 14,158 |
|
| Accounts payable - affiliates | 27,289 |
| 31,799 |
|
| Accrued liabilities | 44,891 |
| 37,436 |
|
| Regulatory liabilities, current | — |
| 84 |
|
| Total current liabilities | 88,989 |
| 83,477 |
|
| | | |
| Long-term debt | 339,791 |
| 339,756 |
|
| | | |
| Deferred credits and other liabilities: | | |
| Deferred income tax liability, net, non-current | 214,657 |
| 211,443 |
|
| Regulatory liabilities, non-current | 53,896 |
| 53,866 |
|
| Benefit plan liabilities | 19,617 |
| 19,544 |
|
| Other, non-current liabilities | 1,351 |
| 1,001 |
|
| Total deferred credits and other liabilities | 289,521 |
| 285,854 |
|
| | | |
| Commitments and contingencies (Notes 4, 5 and 8) |
|
|
| | | |
| Stockholder’s equity: | | |
| Common stock $1 par value; 50,000,000 shares authorized; 23,416,396 shares issued | 23,416 |
| 23,416 |
|
| Additional paid-in capital | 39,575 |
| 39,575 |
|
| Retained earnings | 328,504 |
| 322,933 |
|
| Accumulated other comprehensive loss | (1,238 | ) | (1,262 | ) |
| Total stockholder’s equity | 390,257 |
| 384,662 |
|
| TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 1,108,558 |
| $ | 1,093,749 |
|
The accompanying Notes to Condensed Financial Statements are an integral part of these Condensed Financial Statements.
BLACK HILLS POWER, INC.
CONDENSED STATEMENTS OF CASH FLOWS
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| | | | | | |
| (unaudited) | Three Months Ended March 31, |
| | 2017 | 2016 |
| | (in thousands) |
| Operating activities: | | |
| Net income | $ | 12,570 |
| $ | 11,186 |
|
| Adjustments to reconcile net income to net cash provided by operating activities- | | |
| Depreciation and amortization | 8,694 |
| 8,612 |
|
| Deferred income tax | 2,704 |
| 18,076 |
|
| Employee benefits | 205 |
| 443 |
|
| AFUDC - equity | (471 | ) | (423 | ) |
| Other adjustments, net | 559 |
| 296 |
|
| Change in operating assets and liabilities - | | |
| Accounts receivable and other current assets | 7,908 |
| (3,409 | ) |
| Accounts payable and other current liabilities | (380 | ) | (7,656 | ) |
| Regulatory assets - current | (2,170 | ) | (4,193 | ) |
| Regulatory liabilities - current | (84 | ) | — |
|
| Other operating activities, net | (152 | ) | 481 |
|
| Net cash provided by (used in) operating activities | 29,383 |
| 23,413 |
|
| | | |
| Investing activities: | | |
| Property, plant and equipment additions | (16,976 | ) | (18,928 | ) |
| Change in money pool notes receivable, net | (11,540 | ) | 13,683 |
|
| Other investing activities | 26 |
| (27 | ) |
| Net cash provided by (used in) investing activities | (28,490 | ) | (5,272 | ) |
| | | |
| Financing activities: | | |
| Net cash provided by (used in) financing activities | — |
| — |
|
| | | |
| Net change in cash and cash equivalents | 893 |
| 18,141 |
|
| | | |
| Cash and cash equivalents, beginning of period | 234 |
| 297 |
|
| Cash and cash equivalents, end of period | $ | 1,127 |
| $ | 18,438 |
|
See Note 7 for supplemental cash flow information.
The accompanying Notes to Condensed Financial Statements are an integral part of these Condensed Financial Statements.
BLACK HILLS POWER, INC.
Notes to Condensed Financial Statements
(unaudited)
(Reference is made to Notes to Financial Statements
included in our 2016 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 2016 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 March 31, 2017, December 31, 2016 and March 31, 2016 financial information and are of a normal recurring nature. The results of operations for the three months ended March 31, 2017 and March 31, 2016, and our financial condition as of March 31, 2017 and December 31, 2016 are not necessarily indicative of the results of operations and financial condition to be expected as of or for any other period.
Revisions
Certain revisions have been made to prior years’ financial information to conform to the current year presentation.
We revised our presentation of cash and certain cash transactions processed on behalf of affiliates. We have banking arrangements at certain financial institutions whereby if required, payments of one account are cleared with cash from other accounts at the same financial institution; therefore, book overdrafts are presented on a combined basis by bank as cash and cash equivalents. Cash collected or disbursed on behalf of affiliates is presented as Receivables - affiliates or Accounts Payable - affiliates. Prior year amounts were corrected to conform to the current year presentation, which decreased cash and cash equivalents by $11 million as of March 31, 2016. It also decreased net cash flows provided by operations by $3.3 million for the three months ended March 31, 2016. We assessed the materiality of these changes, taking into account quantitative and qualitative factors, and determined them to be immaterial to the balance sheet as of March 31, 2016 and to the Statements of Cash Flows for the three months ended March 31, 2016. There is no impact to the Statements of Income or Statements of Comprehensive Income (Loss) for any period reported.
Recently Issued and Adopted Accounting Standards
Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost, ASU 2017-07
In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost”. The changes to the standard require employers to report the service cost component in the same line item(s) as other compensation costs, and require the other components of net periodic pension and post-retirement benefit costs to be separately presented in the income statement outside of income from operations. Additionally, only the service cost component may be eligible for capitalization, when applicable. However, all cost components remain eligible for capitalization under FERC regulations. ASU 2017-07 will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension and post-retirement benefit costs in the income statement. The capitalization of the service cost component of net period pension and post-retirement benefit costs in assets will be applied on a prospective basis. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. We are currently assessing the changes to the standard. The presentation changes required for net periodic pension and post-retirement costs will result in offsetting changes to Operating income and Other income and are not expected to be material.
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, ASU 2016-15
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). This ASU requires changes in the presentation of certain items including but not limited to debt prepayment or debt extinguishment costs; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. The ASU will be effective for fiscal years beginning after December 15, 2017. We will use the retrospective transition method to adopt this standard with fiscal years beginning after December 15, 2017. The adoption of this standard will not have a material impact on our financial position, results of operations or cash flows.
Leases, ASU 2016-02
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes ASC 840, Leases. This ASU requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of 12 months or less. The ASU does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. Lessors’ accounting under the ASC is largely unchanged from the previous accounting standard. In addition, the ASU expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective transition approach, which includes a number of practical expedients. The guidance is effective for us beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the impact that adoption of ASU 2016-02 will have on our financial position, results of operations or cash flows.
Revenue from Contracts with Customers, ASU 2014-09
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer. The new disclosure requirements will provide information about the nature, amount, timing and uncertainty of revenue and cash flows from revenue contracts with customers. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017 with early adoption on January 1, 2017 permitted. Entities will have the option of using either a full retrospective or modified retrospective approach to adopting this guidance. Under the modified approach, an entity would recognize the cumulative effect of initially applying the guidance with an adjustment to the opening balance of retained earnings in the period of adoption.
We will adopt this standard for annual and interim reporting periods beginning after December 15, 2017. We continue to actively assess all of our sources of revenue to determine the impact that adoption of the new standard will have on our financial position, results of operations and cash flows. Our evaluation includes identifying revenue streams by like contracts to allow for ease of implementation. A majority of our revenues are from regulated tariff offerings that provide electricity with a defined contractual term. For such arrangements, we expect that the revenue from contracts with the customer will be equivalent to the electricity delivered in that period. Therefore, we do not expect that there will be a significant shift in the timing or pattern of revenue recognition for regulated tariff-based sales. The evaluation of other revenue streams is ongoing, including those tied to longer term contractual commitments. However, a number of industry-specific implementation issues are still unresolved and the final resolution of these issues could impact our current accounting policies and/or patterns for revenue recognition, as well as the transition method selected.
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(2) | ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS |
Following is a summary of Receivables - customers, net included in the accompanying Condensed Balance Sheets (in thousands) as of:
|
| | | | | | |
| | March 31, 2017 | December 31, 2016 |
| Accounts receivable trade | $ | 16,197 |
| $ | 16,972 |
|
| Unbilled revenues | 11,524 |
| 13,799 |
|
| Allowance for doubtful accounts | (264 | ) | (157 | ) |
| Receivables - customers, net | $ | 27,457 |
| $ | 30,614 |
|
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:
|
| | | | | | | | |
| | Recovery/Amortization Period (in years) | March 31, 2017 | | December 31, 2016 |
| Regulatory assets: | | | | |
Unamortized loss on reacquired debt (a) | 8 | $ | 1,745 |
| | $ | 1,815 |
|
Deferred taxes on AFUDC (b) | 45 | 9,607 |
| | 9,367 |
|
Employee benefit plans (c) | 12 | 20,100 |
| | 20,100 |
|
Deferred energy and fuel cost adjustments - current (a) | Less than 1 year | 23,075 |
| | 23,016 |
|
Deferred taxes on flow through accounting (a) | 35 | 12,802 |
| | 12,545 |
|
Decommissioning costs, net of amortization(b) | 8 | 12,025 |
| | 12,456 |
|
Other regulatory assets (a) (d) | 2 | 14,627 |
| | 12,835 |
|
| Total regulatory assets | | $ | 93,981 |
| | $ | 92,134 |
|
|
| | | | | | | | |
| Regulatory liabilities: | | | | |
Cost of removal for utility plant (a) | 61 | $ | 41,592 |
| | $ | 41,541 |
|
Employee benefit plan costs and related deferred taxes (c) | 12 | 12,304 |
| | 12,304 |
|
| Other regulatory liabilities | 13 | — |
| | 105 |
|
| Total regulatory liabilities | | $ | 53,896 |
| | $ | 53,950 |
|
____________________
| |
| (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, respectively. |
| |
| (d) | Includes approximately $14 million and $12 million of vegetation management expenses at March 31, 2017 and December 31, 2016, respectively, for which we are allowed a rate of return. |
| |
| (4) | RELATED-PARTY TRANSACTIONS |
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:
|
| | | | | | | |
| | March 31, 2017 | | December 31, 2016 |
| Receivables - affiliates | $ | 5,390 |
| | $ | 9,526 |
|
| Accounts payable - affiliates | $ | 27,289 |
| | $ | 31,799 |
|
Money Pool Notes Receivable and Notes Payable
We have entered into a Utility Money Pool Agreement (the “Agreement”) with BHC, Black Hills Service Company and the utility companies conducting business as Black Hills Energy. We are the administrator of the Money Pool. Under the Agreement, we may borrow from BHC; however the Agreement restricts us 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 and advances 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 March 31, 2017, the average cost of borrowing under the Utility Money Pool was 1.47%.
We had the following balances with the Utility Money Pool (in thousands) as of:
|
| | | | | | | |
| | March 31, 2017 | | December 31, 2016 |
| Money pool notes receivable, net | $ | 32,949 |
| | $ | 28,409 |
|
Our net interest income (expense) relating to balances with the Utility Money Pool was as follows (in thousands):
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2017 | 2016 |
| Net interest income (expense) | $ | 126 |
| $ | 278 |
|
Other related party activity was as follows (in thousands):
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2017 | 2016 |
| Revenue: | | |
| Energy sold to Cheyenne Light | $ | 878 |
| $ | 661 |
|
| Rent from electric properties | $ | 1,272 |
| $ | 1,213 |
|
| | | |
Fuel and purchased power: | | |
| Purchases of coal from WRDC | $ | 4,280 |
| $ | 4,796 |
|
| Purchase of excess energy from Cheyenne Light | $ | 40 |
| $ | 55 |
|
| Purchase of renewable wind energy from Cheyenne Light - Happy Jack | $ | 606 |
| $ | 664 |
|
| Purchase of renewable wind energy from Cheyenne Light - Silver Sage | $ | 1,019 |
| $ | 1,127 |
|
| | | |
| Gas transportation service agreement: | | |
| Gas transportation service agreement with Cheyenne Light for firm and interruptible gas transportation | $ | 99 |
| $ | 136 |
|
| | | |
| Corporate support: | | |
| Corporate support services and fees from Parent, Black Hills Service Company and Black Hills Utility Holdings | $ | 6,611 |
| $ | 6,721 |
|
| |
(5) | EMPLOYEE BENEFIT PLANS |
The components of net periodic benefit cost for the Defined Benefit Pension Plan were as follows (in thousands):
|
| | | | | | | |
| | Three Months Ended March 31, |
| | 2017 | | 2016 |
| Service cost | $ | 136 |
| | $ | 151 |
|
| Interest cost | 585 |
| | 625 |
|
| Expected return on plan assets | (897 | ) | | (908 | ) |
| Prior service cost | 11 |
| | 11 |
|
| Net loss (gain) | 307 |
| | 499 |
|
| Net periodic benefit cost | $ | 142 |
| | $ | 378 |
|
Defined Benefit Postretirement Healthcare Plan
The components of net periodic benefit cost for the Defined Benefit Postretirement Healthcare Plan were as follows (in thousands):
|
| | | | | | | |
| | Three Months Ended March 31, |
| | 2017 | | 2016 |
| Service cost | $ | 52 |
| | $ | 51 |
|
| Interest cost | 44 |
| | 47 |
|
| Prior service cost (benefit) | (84 | ) | | (84 | ) |
| Net periodic benefit cost | $ | 12 |
| | $ | 14 |
|
Supplemental Non-qualified Defined Benefit Plans
The components of net periodic benefit cost for the Supplemental Non-qualified Defined Benefit Plans were as follows (in thousands):
|
| | | | | | | |
| | Three Months Ended March 31, |
| | 2017 | | 2016 |
| Interest cost | $ | 29 |
| | $ | 30 |
|
| Net loss (gain) | 22 |
| | 21 |
|
| Net periodic benefit cost | $ | 51 |
| | $ | 51 |
|
Contributions
Contributions to the Defined Benefit Pension Plan are cash contributions made directly to the Pension Plan Trust. Contributions to the Healthcare and Supplemental Plans are made in the form of benefit payments. Contributions made for 2017 and anticipated contributions for 2017 and 2018 are as follows (in thousands):
|
| | | | | | | | | |
| | Contributions Three Months Ended March 31, 2017 | Remaining Anticipated Contributions for 2017 | Anticipated Contributions for 2018 |
| Defined Benefit Pension Plan | $ | — |
| $ | 1,305 |
| $ | 660 |
|
| Defined Benefit Postretirement Healthcare Plan | $ | 135 |
| $ | 406 |
| $ | 565 |
|
| Supplemental Non-qualified Defined Benefit Plans | $ | 62 |
| $ | 185 |
| $ | 246 |
|
| |
| (6) | FAIR VALUE OF FINANCIAL INSTRUMENTS |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting guidance on fair value measurements establishes a hierarchy for grouping assets and liabilities, based on significance of inputs. For additional information see Note 1 included in our 2016 Annual Report on Form 10-K filed with the SEC.
The estimated fair values of our financial instruments were as follows (in thousands) as of:
|
| | | | | | | | | | | | | |
| | March 31, 2017 | | December 31, 2016 |
| | Carrying Amount | Fair Value | | Carrying Amount | Fair Value |
Cash and cash equivalents (a) | $ | 1,127 |
| $ | 1,127 |
| | $ | 234 |
| $ | 234 |
|
Long-term debt, including current maturities (b) | $ | 339,791 |
| $ | 424,453 |
| | $ | 339,756 |
| $ | 410,466 |
|
_________________
| |
| (a) | Carrying value approximates fair value due to either short-term length of maturity or variable interest rates that approximate prevailing market rates and therefore is classified in Level 1 in the fair value hierarchy. |
| |
| (b) | Long-term debt is valued using the market approach based on observable inputs of quoted market prices and yields available for debt instruments either directly or indirectly for similar maturities and debt ratings in active markets and therefore is classified in Level 2 in the fair value hierarchy. The carrying amount of our variable rate debt approximates fair value due to the variable interest rates with short reset periods. |
| |
| (7) | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
| | | | | | | |
| Three months ended March 31, | 2017 | | 2016 |
| | (in thousands) |
| Non-cash investing and financing activities - | | | |
| Property, plant and equipment acquired with accrued liabilities | $ | 10,998 |
| | $ | 5,087 |
|
| Non-cash (decrease) to money pool notes receivable, net | $ | (7,000 | ) | | $ | (12,500 | ) |
| Non-cash dividend to Parent | $ | 7,000 |
| | $ | 12,500 |
|
| | | | |
| Cash (paid) refunded during the period for - | | | |
| Interest (net of amounts capitalized) | $ | (3,014 | ) | | $ | (2,989 | ) |
| |
| (8) | 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 2016 Annual Report on Form 10-K.
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
Regulatory Matters
During the first quarter of 2016, we commenced construction of the $54 million, 230-kV, 144 mile-long transmission line that will connect the Teckla Substation in northeast Wyoming, to the Lange Substation near Rapid City, South Dakota. The first segment of this project connecting Teckla to Osage, WY was energized on August 31, 2016. The second segment of the project is expected to be placed in service in the first half of 2017.
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 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 power purchases, 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 March 31, |
| | 2017 | 2016 | Variance |
| | (in thousands) |
| Revenue | $ | 73,794 |
| $ | 68,642 |
| $ | 5,152 |
|
| Fuel and purchased power | 23,149 |
| 20,730 |
| 2,419 |
|
| Gross margin | 50,645 |
| 47,912 |
| 2,733 |
|
| | | | |
| Operating expenses | 27,269 |
| 27,132 |
| 137 |
|
| Operating income | 23,376 |
| 20,780 |
| 2,596 |
|
| | | | |
| Interest income (expense), net | (5,437 | ) | (5,029 | ) | (408 | ) |
| Other income (expense), net | 418 |
| 497 |
| (79 | ) |
| Income tax expense | (5,787 | ) | (5,062 | ) | (725 | ) |
| Net income | $ | 12,570 |
| $ | 11,186 |
| $ | 1,384 |
|
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016. Net income was $13 million compared to $11 million for the same period in the prior year primarily due to the following:
Gross margin increased primarily due to higher transmission revenue and colder weather as compared to the same period in the prior year.
Operating expenses were comparable to the same period in the prior year.
Interest expense, net was comparable to the same period in the prior year.
Other income, net was comparable to the same period in the prior year.
Income tax expense: The effective tax rate was comparable to the same period in the prior year.
|
| | | | | | | | | |
| | Electric Revenue by Customer Type |
| | Three Months Ended March 31, |
| | (in thousands) |
| | 2017 | | Percentage Change | | 2016 |
| Residential | $ | 20,071 |
| | 4% | | $ | 19,315 |
|
| Commercial | 24,291 |
| | 3% | | 23,589 |
|
| Industrial | 8,454 |
| | (1)% | | 8,501 |
|
| Municipal | 836 |
| | 1% | | 831 |
|
| Total retail revenue | 53,652 |
| | 3% | | 52,236 |
|
Contract wholesale (a) | 7,843 |
| | 88% | | 4,174 |
|
Wholesale off-system (b) | 3,833 |
| | (16)% | | 4,586 |
|
| Other revenue | 8,466 |
| | 11% | | 7,646 |
|
| Total revenue | $ | 73,794 |
| | 8% | | $ | 68,642 |
|
____________________
| |
| (a) | Increase from the prior year is primarily due to a new power-sales agreement which was effective January 1, 2017. |
| |
| (b) | Decrease in 2017 revenue was primarily driven by commodity prices that impacted power marketing sales. |
|
| | | | | | | |
| | Megawatt Hours Sold by Customer Type |
| | Three Months Ended March 31, |
| | 2017 | | Percentage Change | | 2016 |
| Residential | 149,572 |
| | 5% | | 142,753 |
|
| Commercial | 196,406 |
| | 4% | | 188,888 |
|
| Industrial | 109,796 |
| | 2% | | 108,021 |
|
| Municipal | 7,605 |
| | 2% | | 7,441 |
|
| Total retail quantity sold | 463,379 |
| | 4% | | 447,103 |
|
Contract wholesale (a) | 186,116 |
| | 193% | | 63,453 |
|
Wholesale off-system (b) | 154,496 |
| | (20)% | | 193,373 |
|
| Total quantity sold | 803,991 |
| | 14% | | 703,929 |
|
| Losses and company use | 41,841 |
| | 6% | | 39,324 |
|
| Total energy | 845,832 |
| | 14% | | 743,253 |
|
____________________
| |
| (a) | Effective January 1, 2017, we have an energy sales agreement with Cargill through December 31, 2021 to supply 50 MW of energy during heavy and light load timing intervals. |
| |
| (b) | Decrease in 2017 sales was primarily driven by commodity prices that impacted power marketing sales. |
|
| | | | | | | |
| | Megawatt Hours Generated and Purchased |
| | Three Months Ended March 31, |
| Generated - | 2017 | | Percentage Change | | 2016 |
| Coal-fired | 387,985 |
| | —% | | 388,001 |
|
Gas-fired (a) | 10,350 |
| | (33)% | | 15,562 |
|
| Total generated | 398,335 |
| | (1)% | | 403,563 |
|
| | | | | | |
Total purchased (b) | 447,497 |
| | 32% | | 339,690 |
|
Total generated and purchased (b) | 845,832 |
| | 14% | | 743,253 |
|
____________________
| |
| (a) | Decrease is primarily due to the ability to purchase excess generation in the open market at a lower cost than to generate for the three months ended March 31, 2017. |
| |
| (b) | Increase in 2017 is primarily driven by resource needs from a new 50 MW power sales agreement with Cargill, effective January 1, 2017. |
|
| | | | | | |
| | Power Plant Availability |
| | Three Months Ended March 31, |
| | 2017 | 2016 |
Coal-fired plants (a) | 89.2 | % | | 92.4 | % | |
| Other plants | 99.4 | % | | 98.3 | % | |
| Total availability | 94.6 | % | | 95.8 | % | |
____________________
| |
| (a) | Decrease is primarily due to a planned outage at Neil Simpson II during the three months ended March 31, 2017. |
|
| | | | | | | | | |
| | Degree Days |
| | Three Months Ended March 31, |
| | 2017 | | 2016 |
| | Actual | Variance from 30-year Average | | Actual | Variance from 30-year Average |
| | | | | | |
| Heating degree days | 3,130 |
| (3 | )% | | 2,806 |
| (13 | )% |
Credit Ratings
Credit ratings impact our ability to obtain short and long-term financing, the cost of such financing, and vendor payment terms, including collateral requirements. The following table represents our secured credit rating from each agency’s review which was in effect at March 31, 2017:
|
| |
| Rating Agency | Secured Rating |
| S&P | A- |
| Moody’s | A1 |
| Fitch | A |
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains 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. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature, including statements contained within Item 2 - Management’s Discussion & Analysis of Financial Condition and Results of Operations.
Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. The Company’s expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management’s examination of historical operating trends, data contained in the Company’s records and other data available from third parties. Nonetheless, the Company’s expectations, beliefs or projections may not be achieved or accomplished.
Any forward-looking statement contained in this document speaks only as of the date on which the statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of the factors, nor can it assess the effect of each factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. All forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are expressly qualified by the risk factors and cautionary statements described in Item 1A of our 2016 Annual Report on Form 10-K, including statements contained within Item 1A - Risk Factors and Part II, Item 1A of this Quarterly Report on Form 10-Q.
| |
| ITEM 4. | CONTROLS AND PROCEDURES |
This section should be read in conjunction with Item 9A, “Controls and Procedures” included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of March 31, 2017. Based on their evaluation, they have concluded that our disclosure controls and procedures were effective as of March 31, 2017.
Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Security Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2017, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
BLACK HILLS POWER, INC.
Part II - Other Information
For information regarding legal proceedings, see Note 11 of Notes to Financial Statements in Item 8 of our 2016 Annual Report on Form 10-K and Note 8 of our Notes to Condensed Financial Statements in this Quarterly Report on Form 10-Q, which information from Note 8 is incorporated by reference into this item.
There are no material changes to the Risk Factors previously disclosed in Item 1A of Part I in our Annual Report on Form 10-K for the year ended December 31, 2016.
| |
| Exhibit 3.1* | Restated Articles of Incorporation of the Registrant dated March 30, 2015 (filed as Exhibit 3.1 to Registrant’s Form 10-Q for the quarterly period ended March 31, 2015). |
| |
| Exhibit 3.2* | Amended and Restated Bylaws of the Registrant dated March 30, 2015 (filed as Exhibit 3.2 to Registrant’s Form 10-Q for the quarterly period ended March 31, 2015). |
| |
| Exhibit 4.1* | Restated and Amended Indenture of Mortgage and Deed of Trust of Black Hills Corporation (now called Black Hills Power, Inc.) dated as of September 1, 1999 (filed as Exhibit 4.19 to the Registrant’s Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-3 (No. 333-150669-01)). First Supplemental Indenture, dated as of August 13, 2002, between Black Hills Power, Inc. and The Bank of New York Mellon (as successor to J.P. Morgan Chase Bank), as Trustee (filed as Exhibit 4.20 to the Registrant’s Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-3 (No. 333-150669-01)). Second Supplemental Indenture, dated as of October 27, 2009, between Black Hills Power, Inc. and The Bank of New York Mellon (filed as Exhibit 4.21 to the Registration Statement on Form S-3 (No. 333-150669-01)). Third Supplemental Indenture, dated as of October 1, 2014, between Black Hills Power, Inc. and The Bank of New York Mellon (filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on October 2, 2014). |
| |
| Exhibit 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. |
| |
| Exhibit 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. |
| |
| Exhibit 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. |
| |
| Exhibit 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. |
| |
| Exhibit 101 | Financial Statements for XBRL Format |
_________________________
| |
| * | Previously filed as part of the filing indicated and incorporated by reference herein. |
BLACK HILLS POWER, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BLACK HILLS POWER, INC.
/S/ DAVID R. EMERY
David R. Emery, Chairman
and Chief Executive Officer
/S/ RICHARD W. KINZLEY
Richard W. Kinzley, Senior Vice President
and Chief Financial Officer
Dated: May 8, 2017
EXHIBIT INDEX
| |
| Exhibit Number | Description |
| |
| Exhibit 3.1* | Restated Articles of Incorporation of the Registrant dated March 30, 2015 (filed as Exhibit 3.1 to Registrant’s Form 10-Q for the quarterly period ended March 31, 2015). |
| |
| Exhibit 3.2* | Amended and Restated Bylaws of the Registrant dated March 30, 2015 (filed as Exhibit 3.2 to Registrant’s Form 10-Q for the quarterly period ended March 31, 2015). |
| |
| Exhibit 4.1* | Restated and Amended Indenture of Mortgage and Deed of Trust of Black Hills Corporation (now called Black Hills Power, Inc.) dated as of September 1, 1999 (filed as Exhibit 4.19 to the Registrant’s Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-3 (No. 333-150669-01)). First Supplemental Indenture, dated as of August 13, 2002, between Black Hills Power, Inc. and The Bank of New York Mellon (as successor to J.P. Morgan Chase Bank), as Trustee (filed as Exhibit 4.20 to the Registrant’s Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-3 (No. 333-150669-01)). Second Supplemental Indenture, dated as of October 27, 2009, between Black Hills Power, Inc. and The Bank of New York Mellon (filed as Exhibit 4.21 to the Registration Statement on Form S-3 (No. 333-150669-01)). Third Supplemental Indenture, dated as of October 1, 2014, between Black Hills Power, Inc. and The Bank of New York Mellon (filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on October 2, 2014). |
| |
| Exhibit 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. |
| |
| Exhibit 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. |
| |
| Exhibit 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. |
| |
| Exhibit 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. |
| |
| Exhibit 101 | Financial Statements for XBRL Format |
_________________________
| |
| * | Previously filed as part of the filing indicated and incorporated by reference herein. |
