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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2019
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 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 x
 
No o
 

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 x
 
No o
 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
Accelerated filer o
 
 
 
 
 
 
 
Non-accelerated filer o
 
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).
 
Yes o
 
No x
 
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 30, 2019
Common stock, $1.00 par value
60,367,972

shares





TABLE OF CONTENTS
 
 
 
Page
 
Glossary of Terms and Abbreviations
 
 
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
Condensed Consolidated Statements of Income - unaudited
 
 
 
   Three Months Ended March 31, 2019 and 2018
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income - unaudited
 
 
 
   Three Months Ended March 31, 2019 and 2018
 
 
 
 
 
 
Condensed Consolidated Balance Sheets - unaudited
 
 
 
   March 31, 2019, December 31, 2018 and March 31, 2018
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows - unaudited
 
 
 
   Three Months Ended March 31, 2019 and 2018
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements - unaudited
 
 
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
 
 
Item 1A.
Risk Factors
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
Item 5.
Other Information
 
 
 
 
 
Item 6.
Exhibits
 
 
 
 
 
 
Signatures
 


2



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
AOCI
Accumulated Other Comprehensive Income (Loss)
Arkansas Gas
Black Hills Energy Arkansas, Inc., a direct, wholly-owned subsidiary of Black Hills Gas Inc.
ASC
Accounting Standards Codification
ASU
Accounting Standards Update issued by the FASB
ATM
At-the-market equity offering program
Availability
The availability factor of a power plant is the percentage of the time that it is available to provide energy.
BHC
Black Hills Corporation; the Company
Black Hills Electric Generation
Black Hills Electric Generation, LLC, a direct, wholly-owned subsidiary of Black Hills Non-regulated Holdings
Black Hills Energy
The name used to conduct the business of our utility companies
Black Hills Power
Black Hills Power, Inc., a direct, wholly-owned subsidiary of Black Hills Corporation (doing business as Black Hills Energy)
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
Busch Ranch I
Busch Ranch Wind Farm is a 29 MW wind farm near Pueblo, Colorado, jointly owned
by Colorado Electric and Black Hills Electric Generation. Colorado Electric and Black
Hills Electric Generation each have a 50% ownership interest in the wind farm.

Busch Ranch II
Busch Ranch II wind project will be a 60 MW wind farm near Pueblo, Colorado, built by Black Hills Electric Generation to provide wind energy to Colorado Electric through a 25-year power purchase agreement.
CAPP
Customer Appliance Protection Plan
Cheyenne Light
Cheyenne Light, Fuel and Power Company, a direct, wholly-owned subsidiary of Black Hills Corporation (doing business as Black Hills Energy)
Choice Gas Program
The unbundling of the natural gas service from the distribution component, which opens up the gas supply for competition allowing customers to choose from different natural gas suppliers. Black Hills Gas Distribution distributes the gas and Black Hills Energy Services is one of the Choice Gas suppliers.
CIAC
Contribution In Aid of Construction
City of Gillette
Gillette, Wyoming
Colorado Electric
Black Hills Colorado Electric, LLC, an indirect, wholly-owned subsidiary of Black Hills
Utility Holdings (doing business as Black Hills Energy)
Colorado IPP
Black Hills Colorado IPP, LLC a 50.1% owned subsidiary of Black Hills Electric Generation
Consolidated Indebtedness to Capitalization Ratio
Any Indebtedness outstanding at such time, divided by Capital at such time. Capital being Consolidated Net-Worth (excluding noncontrolling interest) plus Consolidated Indebtedness (including letters of credit and certain guarantees issued) as defined within the current Credit Agreement.
Cooling Degree Day (CDD)
A cooling degree day is equivalent to each degree that the average of the high and low temperature for a day is above 65 degrees. The warmer the climate, the greater the number of cooling degree days. Cooling degree days are used in the utility industry to measure the relative warmth of weather and to compare relative temperatures between one geographic area and another. Normal degree days are based on the National Weather Service data for selected locations.
CPCN
Certificate of Public Convenience and Necessity
CP Program
Commercial Paper Program
CPUC
Colorado Public Utilities Commission
CVA
Credit Valuation Adjustment
Dodd-Frank
Dodd-Frank Wall Street Reform and Consumer Protection Act
Dth
Dekatherm. A unit of energy equal to 10 therms or one million British thermal units (MMBtu)

3



Equity Unit
Each Equity Unit had a stated amount of $50, consisting of a purchase contract issued by BHC to purchase shares of BHC common stock and a 1/20, or 5% undivided beneficial ownership interest in $1,000 principal amount of BHC RSNs that were formerly due 2028. On November 1, 2018, we completed settlement of the stock purchase contracts that are components of the Equity Units issued in November 2015.
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
Heating Degree Day (HDD)
A heating degree day is equivalent to each degree that the average of the high and the low temperatures for a day is below 65 degrees. The colder the climate, the greater the number of heating degree days. Heating degree days are used in the utility industry to measure the relative coldness of weather and to compare relative temperatures between one geographic area and another. Normal degree days are based on the National Weather Service data for selected locations.
IPP
Independent power producer
IRS
United States Internal Revenue Service
Kansas Gas
Black Hills Kansas Gas Utility Company, LLC, a direct, wholly-owned subsidiary of Black Hills Utility Holdings (doing business as Black Hills Energy)
MMBtu
Million British thermal units
Moody’s
Moody’s Investors Service, Inc.
MWh
Megawatt-hours
Nebraska Gas
Black Hills Nebraska Gas Utility Company, LLC, a direct, wholly-owned subsidiary of Black Hills Utility Holdings (doing business as Black Hills Energy)
NPSC
Nebraska Public Service Commission
PPA
Power Purchase Agreement
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 30, 2018 and now terminates on July 30, 2023.
RSNs
Remarketable junior subordinated notes, issued on November 23, 2015
SEC
U. S. Securities and Exchange Commission
SourceGas
SourceGas Holdings LLC and its subsidiaries, a gas utility owned by funds managed by Alinda Capital Partners and GE Energy Financial Services, a unit of General Electric Co. (NYSE:GE) that was acquired on February 12, 2016, and is now named Black Hills Gas Holdings, LLC (doing business as Black Hills Energy)
SourceGas Acquisition
The acquisition of SourceGas Holdings, LLC by Black Hills Utility Holdings
S&P
Standard and Poor’s, a division of The McGraw-Hill Companies, Inc.
South Dakota Electric
Includes Black Hills Power operations in South Dakota, Wyoming and Montana
SSIR
System Safety and Integrity Rider
TCJA
Tax Cuts and Jobs Act enacted on December 22, 2017
Tech Services
Non-regulated product lines within Black Hills Corporation 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-owner gas infrastructure facilities, typically through one-time contracts.
WPSC
Wyoming Public Service Commission
Wyodak Plant
Wyodak, a 362 MW mine-mouth coal-fired plant in Gillette, Wyoming, owned 80% by Pacificorp and 20% by Black Hills Energy South Dakota. Our WRDC mine supplies all of the fuel for the plant.
Wyoming Electric
Includes Cheyenne Light’s electric utility operations


4



 

BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended March 31,
 
2019
2018
 
(in thousands, except per share amounts)
 
 
 
Revenue
$
597,810

$
575,389

 
 
 
Operating expenses:
 
 
Fuel, purchased power and cost of natural gas sold
248,779

247,639

Operations and maintenance
123,913

116,096

Depreciation, depletion and amortization
51,028

48,590

Taxes - property and production
13,519

13,300

Other operating expenses
440

1,490

Total operating expenses
437,679

427,115

 
 
 
Operating income
160,131

148,274

 
 
 
Other income (expense):
 
 
Interest charges -
 
 
Interest expense incurred net of amounts capitalized (including amortization of debt issuance costs, premiums and discounts)
(35,974
)
(35,438
)
Allowance for funds used during construction - borrowed
958

133

Interest income
299

310

Allowance for funds used during construction - equity
48

68

Other income (expense), net
(837
)
(172
)
Total other income (expense)
(35,506
)
(35,099
)
 
 
 
Income before income taxes
124,625

113,175

Income tax benefit (expense)
(17,263
)
25,802

Income from continuing operations
107,362

138,977

Net (loss) from discontinued operations

(2,343
)
Net income
107,362

136,634

Net income attributable to noncontrolling interest
(3,554
)
(3,630
)
Net income available for common stock
$
103,808

$
133,004

 
 
 
Amounts attributable to common shareholders:
 
 
Net income from continuing operations
$
103,808

$
135,347

Net (loss) from discontinued operations

(2,343
)
Net income available for common stock
$
103,808

$
133,004

 
 
 
Earnings (loss) per share of common stock, Basic -
 
 
Earnings from continuing operations
$
1.73

$
2.54

(Loss) from discontinued operations

(0.05
)
Total earnings per share of common stock, Basic
$
1.73

$
2.49

 
 
 
Earnings (loss) per share of common stock, Diluted -
 
 
Earnings from continuing operations
$
1.73

$
2.50

(Loss) from discontinued operations

(0.04
)
Total earnings per share of common stock, Diluted
$
1.73

$
2.46

 
 
 
Weighted average common shares outstanding:
 
 
Basic
59,920

53,319

Diluted
60,060

54,122



The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these Condensed Consolidated Financial Statements.

5




BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)
Three Months Ended
March 31,
 
2019
2018
 
(in thousands)
 
 
 
Net income
$
107,362

$
136,634

 
 
 
Other comprehensive income (loss), net of tax:
 
 
Reclassification adjustments of benefit plan liability - prior service cost (net of tax of $5 and $10, respectively)
(14
)
(35
)
Reclassification adjustments of benefit plan liability - net gain (loss) (net of tax of $(53) and $(136), respectively)
167

486

Derivative instruments designated as cash flow hedges:
 
 
Reclassification of net realized (gains) losses on settled/amortized interest rate swaps (net of tax of $(163) and $(152), respectively)
550

561

Net unrealized gains (losses) on commodity derivatives (net of tax of $(54) and $69, respectively)
180

(228
)
Reclassification of net realized (gains) losses on settled commodity derivatives (net of tax of $128 and $(145), respectively)
(426
)
476

Other comprehensive income, net of tax
457

1,260

 
 
 
Comprehensive income
107,819

137,894

Less: comprehensive income attributable to noncontrolling interest
(3,554
)
(3,630
)
Comprehensive income available for common stock
$
104,265

$
134,264


See Note 13 for additional disclosures.

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these Condensed Consolidated Financial Statements.

6



BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)
As of
 
March 31,
2019
 
December 31, 2018
 
March 31,
2018
 
(in thousands)
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
12,225

 
$
20,776

 
$
30,947

Restricted cash
3,494

 
3,369

 
2,958

Accounts receivable, net
282,602

 
269,153

 
257,772

Materials, supplies and fuel
87,676

 
117,299

 
82,045

Derivative assets, current
932

 
1,500

 
295

Income tax receivable, net
15,309

 
12,978

 
13,900

Regulatory assets, current
54,303

 
48,776

 
54,492

Other current assets
28,029

 
29,982

 
24,972

Current assets held for sale

 

 
24,724

Total current assets
484,570

 
503,833

 
492,105

 
 
 
 
 
 
Investments
41,247

 
41,013

 
40,927

 
 
 
 
 
 
Property, plant and equipment
6,127,050

 
6,000,015

 
5,608,539

Less: accumulated depreciation and depletion
(1,187,112
)
 
(1,145,136
)
 
(1,048,933
)
Total property, plant and equipment, net
4,939,938

 
4,854,879

 
4,559,606

 
 
 
 
 
 
Other assets:
 
 
 
 
 
Goodwill
1,299,454

 
1,299,454

 
1,299,454

Intangible assets, net
14,136

 
14,337

 
7,357

Regulatory assets, non-current
232,404

 
235,459

 
212,740

Other assets, non-current
25,823

 
14,352

 
14,800

Total other assets, non-current
1,571,817

 
1,563,602

 
1,534,351

 
 
 
 
 
 
TOTAL ASSETS
$
7,037,572

 
$
6,963,327

 
$
6,626,989


The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these Condensed Consolidated Financial Statements.

7



BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(unaudited)
As of
 
March 31,
2019
 
December 31, 2018
 
March 31,
2018
 
(in thousands, except share amounts)
LIABILITIES AND TOTAL EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
178,678

 
$
210,609

 
$
106,281

Accrued liabilities
196,072

 
215,501

 
194,040

Derivative liabilities, current
95

 
947

 
891

Regulatory liabilities, current
45,777

 
29,810

 
42,499

Notes payable
164,650

 
185,620

 
164,200

Current maturities of long-term debt
5,743

 
5,743

 
255,743

Current liabilities held for sale

 

 
24,910

Total current liabilities
591,015

 
648,230

 
788,564

 
 
 
 
 
 
Long-term debt
2,950,299

 
2,950,835

 
2,858,787

 
 
 
 
 
 
Deferred credits and other liabilities:
 
 
 
 
 
Deferred income tax liabilities, net
337,184

 
311,331

 
290,491

Regulatory liabilities, non-current
511,482

 
510,984

 
495,362

Benefit plan liabilities
145,883

 
145,147

 
160,580

Other deferred credits and other liabilities
118,007

 
109,377

 
105,221

Total deferred credits and other liabilities
1,112,556

 
1,076,839

 
1,051,654

 
 
 
 
 
 
Commitments and contingencies (See Notes 8, 10, 15, 16)


 

 

 
 
 
 
 
 
Equity:
 
 
 
 
 
Stockholders’ equity —
 
 
 
 
 
Common stock $1 par value; 100,000,000 shares authorized; issued 60,378,020; 60,048,567; and 53,648,817 shares, respectively
60,378

 
60,049

 
53,649

Additional paid-in capital
1,469,410

 
1,450,569

 
1,151,933

Retained earnings
777,262

 
700,396

 
656,161

Treasury stock, at cost – 23,756; 44,253; and 53,959 shares, respectively
(1,432
)
 
(2,510
)
 
(3,049
)
Accumulated other comprehensive income (loss)
(26,459
)
 
(26,916
)
 
(39,924
)
Total stockholders’ equity
2,279,159

 
2,181,588

 
1,818,770

Noncontrolling interest
104,543

 
105,835

 
109,214

Total equity
2,383,702

 
2,287,423

 
1,927,984

 
 
 
 
 
 
TOTAL LIABILITIES AND TOTAL EQUITY
$
7,037,572

 
$
6,963,327

 
$
6,626,989


The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these Condensed Consolidated Financial Statements.

8



BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31,
 
2019
2018
Operating activities:
(in thousands)
Net income
$
107,362

$
136,634

Loss from discontinued operations, net of tax

2,343

Income from continuing operations
107,362

138,977

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation, depletion and amortization
51,028

48,590

Deferred financing cost amortization
2,007

1,900

Stock compensation
3,296

2,209

Deferred income taxes
19,602

(25,430
)
Employee benefit plans
3,137

3,378

Other adjustments, net
4,428

3,053

Changes in certain operating assets and liabilities:
 
 
Materials, supplies and fuel
29,387

31,196

Accounts receivable, unbilled revenues and other operating assets
(15,857
)
(25,113
)
Accounts payable and other operating liabilities
(41,689
)
(71,149
)
Regulatory assets - current
13,031

47,903

Regulatory liabilities - current
(1,635
)
16,098

Other operating activities, net
1,796

(278
)
Net cash provided by operating activities of continuing operations
175,893

171,334

Net cash provided by (used in) operating activities of discontinued operations

(1,459
)
Net cash provided by operating activities
175,893

169,875

 
 
 
Investing activities:
 
 
Property, plant and equipment additions
(144,126
)
(69,972
)
Purchase of investment

(23,500
)
Other investing activities
(901
)
(261
)
Net cash provided by (used in) investing activities of continuing operations
(145,027
)
(93,733
)
Net cash provided by (used in) investing activities of discontinued operations

20,179

Net cash provided by (used in) investing activities
(145,027
)
(73,554
)
 
 
 
Financing activities:
 
 
Dividends paid on common stock
(30,332
)
(25,444
)
Common stock issued
19,949

372

Net (payments) borrowings of short-term debt
(20,970
)
(47,100
)
Long-term debt - repayments
(1,436
)
(1,436
)
Distributions to noncontrolling interest
(4,846
)
(5,648
)
Other financing activities
(1,657
)
(1,400
)
Net cash provided by (used in) financing activities
(39,292
)
(80,656
)
Net change in cash, cash equivalents and restricted cash
(8,426
)
15,665

Cash, cash equivalents and restricted cash at beginning of period
24,145

18,240

Cash, cash equivalents and restricted cash at end of period
$
15,719

$
33,905



See Note 14 for supplemental disclosure of cash flow information.

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these Condensed Consolidated Financial Statements.

9



BLACK HILLS CORPORATION

Notes to Condensed Consolidated Financial Statements
(unaudited)
(Reference is made to Notes to Consolidated Financial Statements
included in the Company’s 2018 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 thereto included in our 2018 Annual Report on Form 10-K filed with the SEC.

Segment Reporting

We conduct our operations through the following reportable segments: Electric Utilities, Gas Utilities, Power Generation and Mining. Our reportable segments are based on our method of internal reporting, which is generally segregated by differences in products, services and regulation. All of our operations and assets are located within the United States.

Accounting standards for presentation of segments requires an approach based on the way we organize the segments for making operating decisions and how the chief operating decision maker (CODM) assesses performance.  We have changed our segment performance metrics and concluded that adjusted operating income, instead of net income available for common stock which was used previously, is the most relevant metric for measuring segment performance.

The CODM assesses the performance of our segments by using adjusted operating income, which considers the power sales arrangement between Colorado IPP and Colorado Electric be treated as an executory contract. Adjusted operating income adjusts this power sales arrangement from being accounted for as a capital lease to being accounted for as an executory contract on an accrual basis. This adjustment impacts Electric Utilities and Power Generation segments and Corporate and Other. There were no adjustments to Gas Utilities and Mining segments and this adjustment had no effect on our consolidated operating income.
 
The change to our segment performance measure resulted in a revision of the Company’s segment disclosures for all periods to report adjusted operating income as the measure of segment profit and adjust revenues, operating income, and total assets for the power sales agreement to an executory contract and not a capital lease. See Notes 2 and 3 for more information.

On November 1, 2017, the BHC board of directors approved a complete divestiture of our Oil and Gas segment. We completed the divestiture of our Oil and Gas segment in 2018. The Oil and Gas segment assets and liabilities have been classified as held for sale and the results of operations are shown in income (loss) from discontinued operations, except for certain general and administrative costs and interest expense which do not meet the criteria for income (loss) from discontinued operations. At the time the assets were classified as held for sale, depreciation, depletion and amortization expenses were no longer recorded. Unless otherwise noted, the amounts presented in the accompanying notes to the Condensed Consolidated Financial Statements relate to the Company’s continuing operations. See Note 17 for more information on discontinued operations.


10




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, 2019, December 31, 2018, and March 31, 2018 financial information and are of a normal recurring nature. Certain industries in which we operate are highly seasonal, and revenue from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Demand for electricity and natural gas is sensitive to seasonal cooling, heating and industrial load requirements. In particular, the normal peak usage season for electric utilities is June through August while the normal peak usage season for gas utilities is November through March. Significant earnings variances can be expected between the Gas Utilities segment’s peak and off-peak seasons. Due to this seasonal nature, our results of operations for the three months ended March 31, 2019 and March 31, 2018, and our financial condition as of March 31, 2019, December 31, 2018, and March 31, 2018, are not necessarily indicative of the results of operations and financial condition to be expected for any other period. All earnings per share amounts discussed refer to diluted earnings per share unless otherwise noted.

Recently Issued Accounting Standards

Simplifying the Test for Goodwill Impairment, 2017-04

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment by eliminating step 2 from the goodwill impairment test. Under the new guidance, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit. The new standard is effective for interim and annual reporting periods beginning after December 1, 2019, applied on a prospective basis with early adoption permitted. We do not anticipate the adoption of this guidance to have any impact on our financial position, results of operations or cash flows.

Recently Adopted Accounting Standards

Leases, ASU 2016-02

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by requiring the recognition of right-of-use assets and lease liabilities on the balance sheet for most leases, whereas previously only financing-type lease liabilities (capital leases) were recognized on the balance sheet. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

We adopted the standard effective January 1, 2019. We elected not to recast comparative periods coinciding with the new lease standard transition and will report these comparative periods as presented under previous lease guidance. In addition, we elected the package of practical expedients permitted under the transition guidance with the new standard, which among other things, allowed us to carry forward the historical lease classification. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for existing land easement agreements.

Adoption of the new standard resulted in the recording of an operating lease right-of-use asset of $3.1 million, an operating lease obligation liability of $3.2 million, and an accrued rent receivable of $4.5 million, as of January 1, 2019. The cumulative effect of the adoption, net of tax impact, was $3.4 million, which was recorded as an adjustment to retained earnings.

Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, ASU 2017-12

Effective January 1, 2019, we adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This standard better aligns risk management activities and financial reporting for hedging relationships, simplifies hedge accounting requirements and improves disclosures of hedging arrangements. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.




11




(2)    REVENUE

Revenue Recognition

As of January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and its related amendments (collectively known as ASC 606). Revenue is recognized in an amount that reflects the consideration we expect to receive in exchange for goods or services, when control of the promised goods or services is transferred to our customers. The following 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 reporting segments, for the three months ended March 31, 2019 and 2018. Sales tax and other similar taxes are excluded from revenues.

 
 
 
 
 
 
 

 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 Electric Utilities
 Gas Utilities
 
 Power Generation (a)
 Mining
Inter-company Revenues (a)
Total
Customer types:
(in thousands)
Retail
$
153,463

$
354,275

 
$

$
15,829

$
(8,128
)
$
515,439

Transportation

44,517

 


(432
)
44,085

Wholesale
8,343


 
15,469


(13,213
)
10,599

Market - off-system sales
6,692

217

 


(2,224
)
4,685

Transmission/Other
14,175

13,190

 


(4,203
)
23,162

Revenue from contracts with customers
182,673

412,199

 
15,469

15,829

(28,200
)
597,970

Other revenues
254

(1,119
)
(b) 
9,776

600

(9,671
)
(160
)
Total revenues
$
182,927

$
411,080

 
$
25,245

$
16,429

$
(37,871
)
$
597,810

 
 
 
 
 
 
 
 
Timing of revenue recognition:
 
 
 
 
 
 
 
Services transferred at a point in time
$

$

 
$

$
15,829

$
(8,128
)
$
7,701

Services transferred over time
182,673

412,199

 
15,469


(20,072
)
590,269

Revenue from contracts with customers
$
182,673

$
412,199

 
$
15,469

$
15,829

$
(28,200
)
$
597,970

 
 
 
 
 
 
 
 





12



Three Months Ended March 31, 2018
 Electric Utilities
 Gas Utilities
 
 Power Generation (a)
 Mining
Inter-company Revenues (a)
Total
Customer Types:
 
 
 
 
 
 
 
Retail
$
147,057

$
341,394

 
$

$
16,557

$
(7,842
)
$
497,166

Transportation

41,669

 


(409
)
41,260

Wholesale
9,050


 
14,769


(13,049
)
10,770

Market - Off-System Sales
4,144

427

 


(2,522
)
2,049

Transmission/Other
13,071

12,670

 


(3,631
)
22,110

Revenue from contracts with customers
$
173,322

$
396,160

 
$
14,769

$
16,557

$
(27,453
)
$
573,355

Other Revenues
233

1,184

(b) 
9,170

571

(9,124
)
2,034

Total Revenues
$
173,555

$
397,344

 
$
23,939

$
17,128

$
(36,577
)
$
575,389

 
 
 
 
 
 
 
 
Timing of Revenue Recognition:
 
 
 
 
 
 
 
Services transferred at a point in time
$

$

 
$

$
16,557

$
(7,842
)
$
8,715

Services transferred over time
173,322

396,160

 
14,769


(19,611
)
564,640

Revenue from contracts with customers
$
173,322

$
396,160

 
$
14,769

$
16,557

$
(27,453
)
$
573,355

 
 
 
 
 
 
 
 


(a)
Due to changes to our segment performance measure as disclosed in Note 1, Power Generation Wholesale revenue was recast for the three months ended March 31, 2018 which resulted in a change of $0.8 million. For the three months ended March 31, 2019, the impact to Power Generation Wholesale revenue was $3.4 million. The changes to Power Generation were offset by changes to eliminations in Inter-company Revenues and there was no impact to our consolidated Total Revenues.
(b)
Other revenues in the Gas Utilities segment include alternative revenue programs related to weather normalization mechanisms for Arkansas Gas and Kansas Gas that are considered out of scope for ASC 606.

Contract Balances

The nature of our primary revenue contracts provides an unconditional right to consideration upon service delivery; therefore, no customer contract assets or liabilities exists. The unconditional right to consideration is represented by the balance in our Accounts Receivable further discussed in Note 4. We do not typically incur costs that would be capitalized to obtain or fulfill a revenue contract.


13



(3)    BUSINESS SEGMENT INFORMATION

Our reportable segments are based on our method of internal reporting, which is generally segregated by differences in products, services and regulation.

As disclosed in Note 1, changes to our segment performance measure resulted in a revision of the Company’s segment disclosures for all periods to adjust revenues, operating income, and assets related to the power sales arrangement between Colorado IPP and Colorado Electric from being accounted for as a capital lease to being accounted for as an executory contract on an accrual basis. This change had no effect on our consolidated revenues, operating income, or total assets. See below for more information.

Segment information and Corporate and Other is as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
External Operating
Revenue
 
Inter-company Operating Revenue
 
Total Revenues
 Contract Customers
 Other Revenues
 Contract Customers
 Other Revenues
Segment:
 
 
 
 
 
 
 
Electric Utilities
$
176,663

$
254

 
$
6,010

$

 
$
182,927

Gas Utilities (a)
411,500

(1,119
)
 
699


 
411,080

Power Generation (b)
2,257

436

 
13,212

9,340

 
25,245

Mining
7,550

269

 
8,279

331

 
16,429

Corporate and Other


 


 

Inter-company eliminations (b)


 
(28,200
)
(9,671
)
 
(37,871
)
Total
$
597,970

$
(160
)
 
$

$

 
$
597,810

 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
External Operating Revenue
 
Inter-company Operating Revenue
 
 Total Revenues
 Contract Customers
 Other Revenues
 Contract Customers
 Other Revenues
Segment:
 
 
 
 
 
 
 
Electric Utilities
$
167,178

$
233

 
$
6,144

$

 
$
173,555

Gas Utilities (a)
395,742

1,184

 
418


 
397,344

Power Generation (b)
1,720

371

 
13,049

8,799

 
23,939

Mining
8,715

246

 
7,842

325

 
17,128

Corporate and Other


 


 

Inter-company eliminations (b)


 
(27,453
)
(9,124
)
 
(36,577
)
Total
$
573,355

$
2,034

 
$

$

 
$
575,389



(a)
Other revenues in the Gas Utilities segment include alternative revenue programs related to weather normalization mechanisms for Arkansas Gas and Kansas Gas that are considered out of scope for ASC 606.
(b)
Due to changes to our segment performance measure, Power Generation Inter-company Operating Revenue for Contract Customers was recast for the three months ended March 31, 2018 which resulted in a change of $0.8 million. For the three months ended March 31, 2019, the impact to Power Generation Inter-company Operating Revenue for Contract Customers was $3.4 million. The changes to Power Generation were offset by changes to Inter-company eliminations and there was no impact on our consolidated Total revenues.

14



 
 
 
 
Three Months Ended March 31,
 
2019
2018
Adjusted operating income:
 
 
Electric Utilities (a)
$
41,020

$
38,480

Gas Utilities
103,314

95,443

Power Generation (a)
11,967

11,776

Mining
4,337

4,271

Corporate and Other (a)
(507
)
(1,696
)
Operating income
160,131

148,274

 
 
 
Interest expense, net
(34,717
)
(34,995
)
Other income (expense), net
(789
)
(104
)
Income tax benefit (expense) (b)
(17,263
)
25,802

Income from continuing operations
107,362

138,977

Net (loss) from discontinued operations

(2,343
)
Net income
107,362

136,634

Net income attributable to noncontrolling interest
(3,554
)