ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Summary
We are a customer-focused energy solutions provider with a mission of Improving Life with Energy for 1.35 million customers and 800+ communities we serve. Our aspiration is to be the trusted energy partner across our growing eight-state footprint, including Arkansas, Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota, and Wyoming. Our strategy is centered on four priorities: People & Culture—build a team that wins together, Operational Excellence—relentlessly deliver on our commitment to serve our customers, Transformation—be a simple and connected company and Growth—grow to be a dominant long-term energy provider.
We conduct our business operations through two operating segments: Electric Utilities and Gas Utilities. Certain unallocated corporate expenses that support our operating segments are presented as Corporate and Other. We conduct our utility operations under the name Black Hills Energy predominantly in rural areas of the Rocky Mountains and Midwestern states. We consider ourself a domestic electric and natural gas utility company.
We have provided energy and served customers for 141 years, since the 1883 gold rush days in Deadwood, South Dakota. Throughout our history, the common thread that unites the past to the present is our commitment to serve our customers and communities. By being responsive and service focused, we can help our customers and communities thrive while meeting rapidly changing customer expectations.
Key Elements of our Business Strategy
Explore opportunities as an energy solutions provider. A key strategic initiative is to grow our business through innovative energy solutions with new customers and partnerships. We see value creation by recruiting new customers and expanding existing partnerships with data centers and blockchain customers; exploring energy markets; and expanding our transmission capabilities. A few recent examples of our initiatives to grow our business as an energy solutions provider include:
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Announced Partnership with Meta. On July 11, 2024, Wyoming Electric announced it will partner with Meta to provide power for its newest AI data center to be constructed in Cheyenne, Wyoming. Wyoming Electric plans to procure market energy under its LPCS Tariff with customized energy resources essential to Meta's operations and sustainability objectives.
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Innovatively served LPCS load: In 2022, Wyoming Electric entered into two new PPAs with third parties to purchase up to 106 MWs of wind energy and up to 150 MWs of solar energy, upon construction of new renewable generation facilities (owned by third parties). The new wind generation facility was placed in service in December 2023 and the solar facility was placed in service in March 2024. The renewable energy from these PPAs is used to serve our expanding partnerships with LPCS customers.
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Expanded BCIS Load: We have supported enabling legislation in Wyoming for the growing blockchain businesses while implementing our own BCIS Tariff to serve these customers. We currently have agreements with two customers to provide up to 130 MWs in Cheyenne, Wyoming under this Tariff. Energy is sourced through the electric energy market and delivered through our Electric Utilities’ infrastructure. Under these agreements, the customers are responsible for costs of service, and the load is interruptible to prioritize the needs of Wyoming Electric’s existing retail customers.
Modernize and operate utility infrastructure to provide customers with safe, reliable, cost-effective electric and natural gas service. Our utilities own and operate large electric and natural gas infrastructure systems with a geographic footprint that spans nearly 1,600 miles. Our Electric Utilities own and operate 1,394 MWs of generation capacity and 9,196 miles of transmission and distribution lines and our Gas Utilities own and operate approximately 49,000 miles of natural gas transmission and distribution pipelines.
A key strategic focus is to modernize and harden our utility infrastructure to meet customers’ and communities’ varied energy needs, ensure the continued delivery of safe, reliable and cost-effective energy and reduce GHG emissions intensity. In addition, we invest in the expansion, capacity, and integrity of our systems to meet customer growth.
To meet our electric customers’ continued expectations of high levels of reliability, a key strength of the Company, our Electric Utilities utilize an integrity program to ensure the timely repair and replacement of aging infrastructure. Recent examples of our efforts within our integrity program include:
•
Continued Construction on Ready Wyoming Project: In November 2021, Wyoming Electric announced its Ready Wyoming electric transmission expansion initiative. Construction of the 260-mile, multi-phase transmission expansion project commenced in late 2023 and the first phase was placed in service in December 2024. The project is expected to be completed in multiple segments through 2025 and will interconnect South Dakota Electric’s and Wyoming Electric’s transmission systems. The project will provide customers long-term price stability and greater flexibility as power markets develop in the Western States. This project is also expected to attract data center and blockchain customers, enable economic growth in Wyoming, expand access to renewable resources and facilitate additional renewable development across wind- and sun-rich resource areas.
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Advanced South Dakota IRP: In June 2021, South Dakota Electric submitted an IRP to the SDPUC and WPSC. The IRP outlines a range of options over a 20-year planning horizon to meet long-term forecasted energy needs while strengthening reliability and resiliency of the grid. The analysis focused on the least-cost resource needs to best meet customers’ future peak energy needs while maintaining system flexibility and achieving the Company’s generation emissions reduction goals. South Dakota Electric's resource plan in the near-term planning period through 2026 includes the conversion of Neil Simpson II to dual fuel (natural gas and coal) in 2025, and addition of 99 MWs of utility-owned, dispatchable natural gas generation by the second half of 2026. Regarding the addition of 99 MWs of generation, South Dakota Electric expects to request a CPCN from the WPSC in the first quarter of 2025.
•
Published Wildfire Mitigation Plan: In 2024, we published our first formal WMP, which is an overview of our three-layered approach to manage wildfire risks driven by asset-based risk assessments that include asset programs, integrity programs and operational response. Additionally, we continue to engage stakeholders including community and local agencies regulators, legislative bodies and our industry peers to define, review and advance our wildfire management and mitigation plans, including our PSPS, which we expect to formalize by mid-2025.
Our Gas Utilities utilize a programmatic approach to system-wide pipeline replacement, particularly in high consequence areas. Under the programmatic approach, obsolete, at-risk and vintage materials are replaced in a proactive and systematic time frame. We have removed all cast- and wrought-iron from our natural gas transmission and distribution systems and continue to replace aging infrastructure through programs that prioritize safety and reliability for our customers. Our Gas Utilities are authorized to use system safety, integrity and replacement cost recovery mechanisms that provide for customer rate adjustments, between rate reviews, which allow timely recovery of costs incurred in repairing and replacing the gas delivery systems with a return on the investment.
As of December 31, 2024, we estimate our five-year capital investment to be approximately $4.7 billion, with most of that investment targeted toward upgrading existing utility infrastructure, supporting customer and community growth needs, and complying with safety requirements. Our actual 2024 and forecasted capital expenditures for the next five years from 2025 through 2029 are as follows:
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Actual (a) Forecasted (b)
(in millions)
(a)
Includes accruals for property, plant and equipment as disclosed as supplemental cash flow information in the Consolidated Statements of Cash Flows in the Consolidated Financial Statements in this Annual Report on Form 10-K. Capital expenditures are presented net of CIACs in the Consolidated Statements of Cash Flows.
(b)
Projects are being evaluated by our segments for timing, cost and other factors.
Efficiently plan, construct and operate power generation facilities to serve our Electric Utilities. We best serve customers and communities when generation is vertically integrated into our Electric Utilities and we retain control of the fuel source. This business model remains a core strength and strategy today as we invest in and operate efficient power generation resources to supply cost-effective electricity to our customers. These generation assets can be rate-based or non-regulated assets within our Electric Utilities segment. However, we believe that generation assets that are rate-based provide the most effective long-term benefits to customers.
Our power production strategy focuses on low-cost construction and efficient operation of our generating facilities. Our low power production costs result from a variety of factors including low fuel costs (operations located near energy hubs), efficiency in converting fuel into energy, and low per-unit operating and maintenance costs. In addition, we operate our plants with high levels of Availability as compared to industry benchmarks.
Rate-Based Generation: Rate-based generation assets offer several advantages for customers and shareholders, including:
•
When generating assets are included in the utility rate base and reviewed and approved by government authorities, customer rates are more stable and predictable, and typically less expensive in the long run; especially when compared to power otherwise purchased from the open market through wholesale contracts or PPAs that are periodically re-priced to reflect current and varying market conditions;
•
Regulators participate in a planning process where long-term investments are designed to match long-term energy demand;
•
The lower-risk profile of rate-based generation assets contributes to stronger credit ratings which, in turn, can benefit both customers and investors by lowering the cost of capital;
•
The value of controlling load to most effectively serve our customer demand; and
•
Investors are provided a long-term and stable return on their investment.
Integrated Generation: Our Electric Utilities segment also includes a power generation business that owns non-regulated generating facilities that are contracted through long-term power purchase agreements with our electric utilities. Our power generation business has an experienced staff with significant expertise in planning, building and operating power plants. This team also provides shared services to our Electric Utilities’ generation facilities, resulting in efficient management of all of the Company’s generation assets. Our power generation business competitively bids for energy and capacity through requests for proposals by our Electric Utilities for energy resources necessary to serve customers. This business can bid competitively due to construction expertise, fuel supply advantages and by co-locating new plants at our existing Electric Utilities’ energy complexes, reducing infrastructure and operating costs. All power plants within this business are contracted to our Electric Utilities under long-term contracts, located at our utility-generating complexes and physically integrated into our Electric Utilities’ operations.
Generation Fuel Supply: Our generating facilities are strategically located close to energy hubs that help reduce fuel supply costs. Our Colorado and Wyoming gas-fired generating facilities are located close to major natural gas energy hubs that provide trading liquidity and transparent pricing. Due to their location in the resource rich areas of Colorado and Wyoming, natural gas supply to fuel our gas-fired generation can be sourced at competitive prices. Our coal-fired power plants, all located at the Gillette Energy Complex in northeastern Wyoming, are supplied by our adjacent WRDC coal mine. WRDC provides approximately 3.7 million tons of low-sulfur coal directly to these power plants via a conveyor belt system, minimizing transportation costs. The fuel can be delivered to our adjacent power plants at very cost competitive prices (i.e., $1.19 per MMBtu for year ended December 31, 2024) when compared to alternatives. Nearly all the mine’s production is sold to these on-site generation facilities under long-term supply contracts. Approximately one-half of our production is sold under cost-plus contracts with affiliates.
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Reducing our carbon footprint by proactively integrating alternative and renewable energy into our utility energy supply while mitigating customer rate impacts. A critical component of our strategy involves sustainable operations and reducing emissions. We are committed to cleaner energy and a low carbon future, integrating the Energy Transition and more renewable energy into our overall strategy and decision making. We strongly believe that multiple energy sources, working together, will provide the solutions for a cleaner and resilient energy future.
Many states have enacted, and others are considering, mandatory renewable energy standards, requiring utilities to meet certain thresholds of renewable energy generation. In addition, some states have either enacted or are considering legislation setting GHG emission reduction targets. Federal legislation for renewable energy standards and GHG emission reductions has been considered and may be implemented in the future. Mandates for the use of renewable energy or the reduction of GHG emissions will likely drive the need for significant investment in our Electric Utilities and Gas Utilities segments. These mandates will also likely increase prices for electricity and/or natural gas for our utility customers. As a regulated utility, we are responsible for providing safe, reliable and cost-effective sources of energy to our customers. Accordingly, we employ a customer-focused strategy for complying with standards and regulations that balances our customers’ rate concerns with environmental considerations and administrative and legislative mandates. We attempt to strike this balance by prudently and proactively incorporating renewable energy into our resource supply, while seeking to minimize the magnitude and frequency of rate increases for our utility customers.
In November 2020, we announced clean energy goals to reduce GHG emissions intensity for our Electric Utilities by 40% by 2030 and 70% by 2040 and achieve GHG reductions of 50% by 2035 for our Gas Utilities. Our goals are compared to a 2005 baseline. Electric Utility goals include Scope 1 emissions from electric utility generating units and Scope 3 emissions from purchased power for sales. Our Gas Utilities goal initially included only Scope 1 emissions from distribution system main and service lines. In August 2022, we announced a new "Net Zero by 2035" target for our Gas Utilities, which doubled the previous target of a 50% reduction by 2035 and expanded the scope of the goal to all Scope 1 sources of methane emissions on our distribution system. Net Zero will be achieved through pipeline material and main replacements, advanced leak detection, third-party damage reduction, expanding the use of RNG and hydrogen, and utilizing carbon credit offsets.
During the second quarter of 2024, we published our 2023 Corporate Sustainability Report, highlighting our environmental, social and governance impacts and our progress on major projects and climate goals. We reported a 27% reduction in GHG emissions from our natural gas distribution system since 2022 and are on track to achieve our goal of net zero emissions by 2035. Additionally, we have reduced our electric utility GHG emissions by nearly one-third since 2005 and are on track to achieve our goals to reduce electric emissions intensity by 40% by 2030 and 70% by 2040 compared to 2005.
Our goals are based on prudent and proven solutions to reduce our emissions while minimizing cost impacts to our customers. This keeps our customers at the forefront of our decision-making, which is central to our values. More of our customers, particularly our larger customers, are demanding cleaner sources of energy to meet their sustainability goals. In addition, there is more interest from consumers, regulators and legislators to increase the use of renewable and other alternative energy sources. Recent efforts to support this interest include:
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Advanced Colorado Clean Energy Plan: Colorado Electric's Clean Energy Plan supports its voluntary election to reduce carbon emissions 80% from 2005 levels by 2030. On April 17, 2024, Colorado Electric filed its 120-Day report with the CPUC, recommending the addition of renewable energy resources to advance its Clean Energy Plan. In December 2024, the CPUC approved a preferred portfolio of 100 MWs of utility-owned solar generation, 50 MWs of utility-owned battery storage and a 200 MWs solar PPA. Colorado Electric plans to file a CPCN for utility-owned resources by mid-2025. New resources are expected to be placed in service in 2027-2028.
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Established Green Forward and Expanded RNG Interconnect Projects: In 2022 and 2023, we filed regulatory applications to launch Green Forward, a voluntary RNG and carbon offset program, to eligible residential and small business natural gas customers to offset up to 100% or more of the emissions from their natural gas usage. Our teams continue to evaluate attractive RNG investment opportunities across our agriculture-rich service territories and explore value generation with our natural gas storage assets. We also continue to expand our RNG interconnections, with 10 projects actively injecting RNG into our natural gas system.
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Acquired RNG Production Facility: In January 2024, Black Hills Energy Renewable Resources acquired a RNG production facility at a landfill in Dubuque, Iowa. The facility currently injects RNG into the natural gas distribution system serving Dubuque, which is owned and operated by Iowa Gas. This acquisition represents our entry into the production of RNG as a nonregulated business while leveraging our expertise in owning and operating regulated natural gas pipeline systems, including RNG interconnections. The RNG produced from the landfill facility captures methane that would otherwise vent into the atmosphere. It is delivered under long-term contracts to a third party that purchases the RNG and its related environmental attributes, in conformity with the EPA's Renewable Fuel Standard Program.
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Inflation Reduction Act
The IRA, enacted in August 2022, features spending and tax incentives on clean energy provisions. Most notably, the IRA includes provisions that extend and expand the production and investment tax credits for wind and solar; includes energy storage, EVs, RNG, and carbon capture and sequestration; and contains a tax credit transferability provision that allows us to transfer (e.g. sell) PTCs produced after December 31, 2022, to third parties. In June 2024, under this transferability provision, we entered into an agreement with a third party to sell $16.9 million of our 2023 generated PTCs. In January 2025, we entered into a similar agreement with a third party to sell $17.0 million of our 2024 generated PTCs. We expect to continue to explore the ability to efficiently monetize our tax credits through third party transferability agreements. See Note 15 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for additional information.
Deliver a competitive total return to investors and maintain an investment grade credit rating. We are proud of our track record of annual dividend increases for shareholders. 2024 represented our 54th consecutive year of increasing dividends. In January 2025, our Board of Directors declared a quarterly dividend of $0.676 per share, equivalent to an annual dividend of $2.704 per share. We anticipate growing our dividend in line with our targeted dividend payout ratio of 55% to 65% of net income. A dependable and increasing dividend is an important component of our strategy for delivering long-term value for our shareholders.
We require access to the capital markets to fund our planned capital investments or acquire strategic assets that support prudent and earnings-accretive business growth. We have demonstrated our ability to cost-effectively access the debt and equity markets, while maintaining our investment-grade issuer credit rating.
Recent Developments
Electric Utilities
•
See Note 2 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for recent rate review activity for Colorado Electric.
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See Key Elements of our Business Strategy section above for discussion of recent developments related to our partnership with Meta, construction progress on our Ready Wyoming project, Colorado Electric's Clean Energy Plan, South Dakota Electric's IRP and the addition of 99 MWs of new generation, and publishing of our first formal WMP and plans to formalize our PSPS.
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In 2024, Wygen I and Pueblo Airport Generation #4-5 experienced unplanned generation outages that had a $8.3 million negative impact to Operating income. We are currently assessing insurance recovery opportunities.
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On January 20, 2025, Wyoming Electric set a new all-time and winter peak load of 318 MWs, surpassing the previous all-time and winter peak load of 314 MWs set on January 11, 2024. Prior to 2024, the previous winter peak was 301 megawatts in December 2023 and the all-time peak was 312 megawatts in July 2023.
Gas Utilities
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See Note 2 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for recent rate review activity for Arkansas Gas, Colorado Gas, Iowa Gas, Kansas Gas and Wyoming Gas.
•
See Key Elements of our Business Strategy section above for discussion of recent developments related to BHERR's purchase of a RNG production facility in Iowa.
Corporate and Other
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See Note 8 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for information regarding our recent ATM program activity and our May 16, 2024, debt offering.
•
On May 31, 2024, we amended and restated our corporate Revolving Credit Facility. See Note 8 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for additional information.
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Results of Operations
Our discussion and analysis for the year ended December 31, 2024, compared to 2023, is included herein. For discussion and analysis for the year ended December 31, 2023, compared to 2022, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on February 14, 2024.
All amounts are presented on a pre-tax basis unless otherwise indicated. Minor differences in amounts may result due to rounding.
Consolidated Summary and Overview
For the Years Ended December 31,
(in millions, except per share amounts)
Operating income (loss):
Corporate and Other (a) (1.2 ) (4.9 ) 3.7 (3.3 ) (1.6 )
Other income (expense), net (1.4 ) (3.2 ) 1.8 1.8 (5.0 )
Weighted average common shares outstanding, Diluted 69.9 67.1 2.8 65.0 2.1
(a)
Includes inter-segment eliminations.
2024 Compared to 2023
•
Electric Utilities’ operating income decreased $15.8 million primarily due to unfavorable impacts from unplanned generation outages in 2024, lower off-system excess energy sales, higher insurance expense, and one-time benefits in 2023 from a gain on the sale of Northern Iowa Windpower assets, a gain on sale of land to support data center growth, and a recovery from our business interruption insurance. These unfavorable variances were partially offset by new rates and rider recovery and retail customer growth and usage.
•
Gas Utilities’ operating income increased $42.5 million primarily due to new rates and rider recovery driven by the Colorado Gas, Iowa Gas, RMNG and Wyoming Gas rate reviews, retail customer growth and usage, favorable mark-to-market on commodity contracts, and lower employee-related expenses partially offset by $15.9 million of unfavorable weather and higher depreciation driven by capital expenditures;
•
Corporate and other operating loss decreased $3.7 million due to lower unallocated operating expenses;
•
Net interest expense increased $13.8 million primarily due to higher interest rates partially offset by increased interest income and increased AFUDC debt driven by higher construction work-in-progress balances;
•
Other (expense), net decreased $1.8 million primarily due to higher AFUDC equity driven by higher construction work-in-progress balances;
•
Income tax (expense) increased $10.7 million driven by higher pre-tax income and a higher effective tax rate primarily due to an $8.2 million tax benefit in 2023 from a Nebraska income tax rate decrease; and
•
Net income attributable to non-controlling interest decreased $3.2 million due to lower net income from Black Hills Colorado IPP primarily driven by unplanned generation outages.
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Segment Operating Results
Non-GAAP Financial Measure
The following discussion includes financial information prepared in accordance with GAAP and a “non-GAAP financial measure", Electric and Gas Utility margin. 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. Electric and Gas Utility margin (revenue less cost of sales) is a non-GAAP financial measure due to the exclusion of operation and maintenance expenses, depreciation and amortization expenses, and taxes other than income taxes from the measure. Electric Utility margin is calculated as operating revenue less cost of fuel and purchased power. Gas Utility margin is calculated as operating revenue less cost of natural gas sold. Our Electric and Gas Utility margin is impacted by the fluctuations in power and natural gas purchases and other fuel supply costs. However, while these fluctuating costs impact Electric and Gas Utility margin as a percentage of revenue, they only impact total Electric and Gas Utility margin if the costs cannot be passed through to our customers. Our Electric and Gas Utility margin measure may not be comparable to other companies’ Electric and Gas Utility margin measures. Furthermore, this measure is not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance.
Electric Utilities
Operating results for the years ended December 31 for the Electric Utilities were as follows:
(in millions)
2024 Compared to 2023
Electric Utility margin increased as a result of:
(in millions)
New rates and rider recovery $ 15.8
Retail customer growth and usage 3.8
Weather 2.7
Off-system excess energy sales (7.8 )
2023 Wygen I revenue recovery under business interruption insurance (a) (5.0 )
Unplanned generation outages (4.0 )
Other (0.7 )
(a)
In 2021, Wygen I experienced an unplanned outage which resulted in lost revenue. A claim for these losses was submitted under our business interruption insurance policy. In 2023, we recovered $5.0 million from our business interruption insurance which was recognized as Revenue.
Operations and maintenance expense increased primarily due to $5.1 million of costs related to unplanned generation outages and $4.6 million of higher insurance expense partially offset by $3.5 million of lower employee-related expenses driven by lower headcount. In 2023, Electric Utilities benefited from one-time gains of $7.7 million on the sale of Northern Iowa Windpower assets and $3.9 million on sale of land.
Depreciation and amortization increased primarily due to higher asset base driven by capital expenditures.
Taxes other than income taxes were comparable.
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Operating Statistics
Revenue Quantities Sold
For the year ended December 31, For the year ended December 31,
(in millions) (in GWh)
Retail Revenue -
(a)
Primarily related to Integrated Generation, inter-segment rent, and non-regulated services to our retail customers under the Service Guard Comfort Plan and Tech Services.
(b)
Includes company uses and line losses.
Revenue Quantities Sold
For the year ended December 31, For the year ended December 31,
(in millions) (in GWh)
For the year ended December 31,
Quantities Generated and Purchased by Fuel Type 2024 2023 2022
(in GWh)
Generated:
Purchased:
(a)
The shift in purchases by fuel type for 2024 compared to 2023 is primarily due to Wyoming Electric's new wind and solar energy PPAs, which replaced market purchases from other fuel types, and are used to serve our LPCS customers. See Key Elements of our Business Strategy section above for additional information.
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For the year ended December 31,
Quantities Generated and Purchased by Business Unit 2024 2023 2022
(in GWh)
Generated:
Purchased:
For the year ended December 31,
Heating Degree Days:
Cooling Degree Days:
(a)
Degree days are calculated based on a weighted average of total customers by state.
For the year ended December 31,
Contracted generating facilities Availability (a) by fuel type 2024 2023 2022
Natural gas and diesel oil (b) 92.9% 92.1% 96.1%
(a)
Availability and Wind Capacity Factor are calculated using a weighted average based on capacity of our generating fleet.
(b)
2024 included unplanned outages at Wygen I and Pueblo Airport Generation #4-5.
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Gas Utilities
Operating results for the years ended December 31 for the Gas Utilities were as follows:
(in millions)
2024 Compared to 2023
Gas Utility margin increased as a result of:
(in millions)
New rates and rider recovery $ 48.7
Mark-to-market on non-utility natural gas commodity contracts 4.9
Retail customer growth and usage 3.6
Operations and maintenance expense decreased primarily due to $10.8 million of lower employee-related expenses driven by lower headcount, $2.9 million decreased bad debt expense attributable to lower customer billings, and $1.2 million of lower training expense partially offset by $3.3 million of higher insurance expense and $2.8 million of higher IT-related expenses.
Depreciation and amortization increased primarily due to a higher asset base driven by capital expenditures.
Taxes other than income taxes were comparable.
Operating Statistics
Revenue Quantities Sold and Transported
For the year ended December 31, For the year ended December 31,
(in millions (Dth in millions)
Retail Revenue -
(a)
Includes Black Hills Energy Services revenue under the Choice Gas Program.
(b)
Retail gas revenues decreased in 2024 compared to 2023 primarily due to lower commodity prices. Our Utilities have regulatory mechanisms that allow them to pass prudently incurred costs of energy through to the customer. Customer billing rates are adjusted periodically to reflect changes in our cost of energy.
(c)
Includes inter-segment rent and non-regulated services under the Service Guard Comfort Plan, Tech Services, and HomeServe.
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Revenue Quantities Sold and Transported
For the year ended December 31, For the year ended December 31,
(in millions) (Dth in millions)
For the year ended December 31,
(a)
Arkansas and Kansas have weather normalization mechanisms that mitigate the weather impact on Gas Utility margins.
(b)
Heating degree days are calculated based on a weighted average of total customers by state excluding Kansas due to its weather normalization mechanism. Arkansas Gas is partially excluded based on the weather normalization mechanism in effect from November through April.
Corporate and Other
Corporate and Other operating results, including inter-segment eliminations, for the years ended December 31 were as follows:
(in millions)
Operating (loss) $ (1.2 ) $ (4.9 ) $ 3.7 $ (3.3 ) $ (1.6 )
2024 Compared to 2023
Operating (loss) decreased primarily due to lower unallocated outside services expenses and a gain on the sale of a Corporate asset.
Consolidated Interest Expense, Other Income (Expense) and Income Tax (Expense)
(in millions)
Other income (expense), net (1.4 ) (3.2 ) 1.8 1.8 (5.0 )
2024 Compared to 2023
Interest expense, net increased due to higher interest rates partially offset by higher interest income and higher AFUDC debt driven by higher construction work-in-progress balances.
Other (expense), net decreased primarily due to higher AFUDC equity driven by higher construction work-in-progress balances.
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Income tax (expense) increased due to higher pre-tax income and a higher effective tax rate. The effective tax rate was 11.3% for 2024 and 8.5% for 2023. The effective tax rate was higher primarily due to a $8.2 million tax benefit in 2023 from a Nebraska income tax rate decrease. See Note 15 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for additional details.
Liquidity and Capital Resources
OVERVIEW
Our company requires significant cash to support and grow our businesses. Our primary sources of cash are generated from our operating activities, Revolving Credit Facility, CP Program, ATM, and ability to access the public and private capital markets through debt and equity securities offerings when necessary. This cash is used for, among other things, working capital, capital expenditures, dividends, pension funding, investments in or acquisitions of assets and businesses, payment of debt obligations, and redemption of outstanding debt and equity securities when required or financially appropriate.
We experience significant cash requirements during peak months of the winter heating season due to higher natural gas consumption, during periods of high natural gas prices, and during the construction season, which typically peaks in spring and summer.
We believe that our cash on hand, operating cash flows, existing borrowing capacity, and ability to complete new debt and equity financings, taken in their entirety, provide sufficient capital resources to fund our ongoing operating requirements, regulatory liabilities, debt maturities, anticipated dividends, and anticipated capital expenditures discussed in this section.
The following table provides an informational summary of our liquidity and capital structure as of December 31:
(dollars in millions)
Cash and cash equivalents $ 16.1 $ 86.6
Capital structure
Total stockholders' equity (excludes non-controlling interest) 3,501.5 3,215.3
Debt to capitalization 55.6 % 57.8 %
Long-term debt to total debt 96.9 % 86.4 %
(a)
Available capacity under Revolving Credit Facility and CP Program represents $750 million of total borrowing capacity less outstanding borrowings and letters of credit. See Note 8 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for more information.
Future Financing Plans
We plan to fund our capital plan and strategic objectives by using cash generated from operating activities and various financing alternatives, which could include our Revolving Credit Facility, our CP Program, and the issuance of common stock under our ATM program or in an opportunistic block trade. In 2025, we plan to renew our Equity Distribution Sales Agreement and assess the renewal of our shelf registration statement. Our Equity Distribution Sales Agreement allows us to sell shares of common stock, from time to time, through our ATM program utilizing our shelf registration statement. We also plan to re-finance our $300 million, 3.95%, senior unsecured notes due January 2026, at or before maturity date.
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CASH FLOW ACTIVITIES
The following tables summarize our cash flows for the years ended December 31:
Operating Activities:
(in millions)
Changes in certain operating assets and liabilities:
2024 Compared to 2023
Net cash provided by operating activities was $225.1 million lower which was attributable to:
•
Total earnings (net income plus non-cash adjustments) were $44.7 million higher primarily as a result of increased Electric and Gas Utility margins due to new rates, rider recovery and customer growth, partially offset by unfavorable weather, higher operating expenses and higher financing costs.
•
Net inflows from changes in certain operating assets and liabilities were $276.5 million lower, primarily attributable to:
o
Cash inflows decreased by approximately $268.4 million as a result of changes in accounts receivable and other current assets primarily due to lower collections on pass-through revenues and lower natural gas in storage inventories driven by fluctuations in commodity prices and timing of injections and withdrawals;
o
Cash outflows decreased by approximately $138.7 million as a result of increases in accounts payable and other current liabilities primarily driven by fluctuations in commodity prices, payment timing of natural gas and power purchases, and changes in other working capital requirements; and
o
Cash inflows decreased by approximately $146.8 million as a result of changes in our regulatory assets and liabilities primarily due to lower recoveries of deferred gas and fuel cost adjustments driven by fluctuations in commodity prices.
•
Cash outflows decreased $6.7 million from other operating activities primarily due to lower costs from cloud computing arrangements.
Investing Activities:
(in millions)
2024 Compared to 2023
Net cash used in investing activities was $209.3 million higher which was attributable to:
•
Cash outflows from capital expenditures (which are net of contributions in aid of construction) increased $188.6 million primarily as a result of Wyoming Electric's Ready Wyoming electric transmission expansion project and Black Hills Energy Renewable Resources' acquisition of a RNG production facility at a landfill in Dubuque, Iowa.
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•
Cash outflows increased $20.7 million for other investing activities primarily due to 2023 proceeds from the sale of Northern Iowa Windpower assets and a sale of land to support data center growth.
Financing Activities:
(in millions)
Distributions to non-controlling interests (17.4 ) (18.3 ) 0.9 (17.4 ) (0.9 )
2024 Compared to 2023
Net cash used in financing activities was $298.8 million lower which was primarily attributable to:
•
Cash outflows increased $14.2 million due to increased dividends paid on increased shares of common stock outstanding;
•
Cash inflows increased $63.1 million due to higher issuances of common stock;
•
Net outflows from changes in short-term and long-term debt (repayments) borrowings decreased $244.4 million due to:
o
Net cash inflows increased $669.4 million as a result of net borrowing activity under our Revolving Credit Facility and CP Program; and
o
Cash inflows decreased $350 million due to issuances of $450 million of senior unsecured notes in May 2024 compared to issuances of $350 million of senior unsecured notes in March 2023 and $450 million of senior unsecured notes in September 2023; and
o
Cash outflows increased $75 million due to repayment of our $600 million senior unsecured notes in August 2024 compared to repayment of our $525 million senior unsecured notes in November 2023.
•
Cash outflows decreased by $4.6 million for other financing activities primarily due to lower financing costs from the May 2024 debt offering compared to the March 2023 and September 2023 debt offerings.
CAPITAL RESOURCES
Shelf Registration Statement
We maintain an effective shelf registration statement with the SEC under which we may issue, from time to time, an unspecified amount of senior debt securities, subordinate debt securities, common stock, preferred stock, warrants, and other securities.
Short-term Debt
We have a $750 million Revolving Credit Facility that matures on May 31, 2029, with two one-year extension options (subject to consent from lenders). This facility is similar to the former revolving credit facility, which includes an accordion feature that allows us to increase total commitments up to $1.0 billion with the consent of the administrative agent, the issuing agents, and each bank increasing or providing a new commitment. We also have a $750 million, unsecured CP Program that is backstopped by the Revolving Credit Facility. Amounts outstanding under the Revolving Credit Facility and the CP Program, either individually or in the aggregate, cannot exceed $750 million.
The Revolving Credit Facility prohibits us from paying cash dividends if a default or an event of default exists prior to, or would result after, paying a dividend. Although these contractual restrictions exist, we do not anticipate triggering any default measures or restrictions.
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The Revolving Credit Facility contains cross-default provisions that could result in a default under such agreements if BHC or its material subsidiaries failed to 1) make timely payments of debt obligations; or 2) triggered other default provisions under any debt agreement totaling, in the aggregate principal amount of $50 million or more that permit the acceleration of debt maturities or mandatory debt prepayment.
See Note 8 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for more information on our Revolving Credit Facility and CP Program.
Utility Money Pool
As a utility holding company, we are required to establish a cash management program to address lending and borrowing activities between our utilities and the Company. We have established utility money pool agreements which address these requirements. These agreements are on file with the FERC and appropriate state regulators. Under the utility money pool agreements, our utilities may, at their option, borrow and extend short-term loans to the utility money pool at market-based rates. While the utility money pool may borrow funds from the Company (as ultimate parent company), the money pool arrangement does not allow loans from our utility subsidiaries to the Company (as ultimate parent company) or to non-regulated affiliates.
Long-term Debt
For information on our long-term debt, see Note 8 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Financial Covenants
The Revolving Credit Facility and Wyoming Electric’s financing agreements contain covenant requirements. We were in compliance with these covenants as of December 31, 2024. See additional information in Note 8 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Equity
For information regarding equity, see Note 8 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
CREDIT RATINGS
Financing for operational needs and capital expenditure requirements, not satisfied by operating cash flows, depends upon the cost and availability of external funds through both short and long-term financing. In order to operate and grow our business, we need to consistently maintain the ability to raise capital on favorable terms. Access to funds is dependent upon factors such as general economic and capital market conditions, regulatory authorizations and policies, the Company’s credit ratings, cash flows from routine operations, and the credit ratings of counterparties. After assessing the current operating performance, liquidity, and credit ratings of the Company, management believes that the Company will have access to the capital markets at prevailing market rates for companies with comparable credit ratings. We note that credit ratings are not recommendations to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.
The following table represents the credit ratings, outlook and risk profile of BHC at December 31, 2024:
Rating Agency Senior Unsecured Rating Outlook
S&P (a) BBB+ Stable
Moody’s (b) Baa2 Stable
Fitch (c) BBB+ Negative
(a)
On May 9, 2024, S&P reported BBB+ rating and maintained a Stable outlook.
(b)
On January 8, 2025, Moody's reported our Baa2 rating and maintained a Stable outlook.
(c)
On January 17, 2025, Fitch affirmed its BBB+ rating for BHC and maintained a Negative outlook. Following the affirmation, the parties jointly withdrew the rating.
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The following table represents the credit ratings of South Dakota Electric at December 31, 2024:
Rating Agency Senior Secured Rating
S&P (a) A
Fitch (b) A
(a)
On May 9, 2024, S&P reported A rating.
(b)
On January 17, 2025, Fitch affirmed its A rating for South Dakota Electric. Following the affirmation, the parties jointly withdrew the rating.
We have not had any triggering events (i.e. an acceleration of repayment of outstanding indebtedness, an increase in interest costs, or the posting of additional cash collateral) tied to our stock price and have not executed any transactions that require us to issue equity based on our credit ratings.
CAPITAL REQUIREMENTS
Capital Expenditures
Capital expenditures are a substantial portion of our cash requirements each year and we continue to forecast a robust capital expenditure program during the next five years. See above in Key Elements of our Business Strategy for forecasted capital expenditure requirements. A significant portion of our capital expenditures are for safety, reliability, and integrity of our system and is included in utility rate base and eligible for recovery from our utility customers with regulatory approval. Those capital expenditures also earn a rate of return authorized by the commissions in the jurisdictions in which we operate.
Our historical capital expenditures by reportable segment are shown in Note 16 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Repayments of Indebtedness
For information relating to repayments of our short- and long-term debt and associated interest payments, see Note 8 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Unconditional Purchase Obligations
We have unconditional purchase obligations which include the energy and capacity costs associated with our PPAs, transmission services agreements, and natural gas capacity, transportation and storage agreements. Additionally, our Gas Utilities have commitments to purchase physical quantities of natural gas under contracts indexed to various forward natural gas price curves. For additional information. see Note 3 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Defined Benefit Pension Plan
We have one defined benefit pension plan, the Black Hills Retirement Plan (Pension Plan). The unfunded status of the Pension Plan is defined as the amount the projected benefit obligation exceeds the plan assets. The unfunded status of the Pension Plan is $41.4 million as of December 31, 2024, compared to $39.5 million as of December 31, 2023. See further information in Note 13 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Common Stock Dividends
Future cash dividends, if any, will be dependent on our results of operations, financial position, cash flows, reinvestment opportunities, and other factors, and will be evaluated and approved by our Board of Directors.
Additionally, there are certain statutory limitations that could affect future cash dividends paid. Federal law places limits on the ability of public utilities within a holding company structure to declare dividends. Specifically, under the Federal Power Act, a public utility may not pay dividends from any funds properly included in a capital account. The utility subsidiaries’ dividends may be limited directly or indirectly by state regulatory commissions or bond indenture covenants. See additional information in Note 8 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
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On January 24, 2025, our Board of Directors declared a quarterly dividend of $0.676 per share, equivalent to an annual dividend rate of $2.704 per share. The table below provides our dividends paid, dividend payout ratio, and dividends paid per share for the three years ended December 31:
(Dividends Paid in millions)
Dividend Payout Ratio 66 % 64 % 61 %
Our three-year compound annualized dividend growth rate was 4.3%.
Collateral Requirements
Our Utilities maintain wholesale commodity contracts for the purchases and sales of electricity and natural gas which have performance assurance provisions that allow the counterparty to require collateral postings under certain conditions, including when requested on a reasonable basis due to a deterioration in our financial condition or nonperformance. A significant downgrade in our credit ratings, such as a downgrade to a level below investment grade, could result in counterparties requiring collateral postings under such adequate assurance provisions. The amount of credit support that we may be required to provide at any point in the future is dependent on the amount of the initial transaction, changes in the market price, open positions, and the amounts owed by or to the counterparty. At December 31, 2024, we had sufficient liquidity to cover collateral that could be required to be posted under these contracts. The cash collateral we were required to post at December 31, 2024, was not material. See Note 9 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Guarantees
We provide various guarantees, which represent off-balance sheet commitments, supporting certain of our subsidiaries under specified agreements or transactions. For more information on these guarantees, see Note 3 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in application. There are also areas which require management’s judgment in selecting among available GAAP alternatives. We are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. We continue to closely monitor the macroeconomic environment and related impacts on our critical accounting estimates including, but not limited to, collectability of customer receivables, recoverability of regulatory assets, impairment risk of goodwill and long-lived assets, and contingent liabilities. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from our estimates and to the extent there are material differences between these estimates, judgments or assumptions, and actual results, our financial statements will be affected. We believe the following accounting estimates are the most critical in understanding and evaluating our reported financial results. We have reviewed these critical accounting estimates and related disclosures with our Audit Committee.
The following discussion of our critical accounting estimates should be read in conjunction with Note 1, “Business Description and Significant Accounting Policies” of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Regulation
Our regulated Electric and Gas Utilities are subject to cost-of-service regulation and earnings oversight from federal and state utility commissions. This regulatory treatment does not provide any assurance as to achievement of desired earnings levels. Our retail electric and gas utility rates are regulated on a state-by-state basis by the relevant state regulatory commissions based on an analysis of our costs, as reviewed and approved in a regulatory proceeding. The rates that we are allowed to charge may or may not match our related costs and allowed return on invested capital at any given time.
Management continually assesses the probability of future recoveries associated with regulatory assets and future obligations associated with regulatory liabilities. Factors such as the current regulatory environment, recently issued rate orders, and historical precedents are considered. As a result, we believe that the accounting prescribed under rate-based regulation remains appropriate and our regulatory assets are probable of recovery in current rates or in future rate proceedings.
To some degree, each of our Electric and Gas Utilities are permitted to recover certain costs (such as increased fuel and purchased power costs) outside of a base rate review. To the extent we are able to pass through such costs to our customers, and a state regulatory commission subsequently determines that such costs should not have been paid by the customers, we may be required to refund such costs.
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As of December 31, 2024, and 2023, we had total regulatory assets of $427.7 million and $480.1 million, respectively, and total regulatory liabilities of $568.7 million and $566.6 million, respectively. See Note 2 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for further information.
Goodwill
We perform a goodwill impairment test on an annual basis or upon the occurrence of events or changes in circumstances that indicate that the asset might be impaired. Our annual goodwill impairment testing date is as of October 1, which aligns with our financial planning process.
Accounting standards for testing goodwill for impairment require the application of either a qualitative or quantitative assessment to analyze whether or not goodwill has been impaired. Goodwill is tested for impairment at the reporting unit level. Under either the qualitative or quantitative assessment, the estimated fair value of a reporting unit is compared with its carrying amount, including goodwill. If the carrying amount exceeds fair value, then an impairment loss would be recognized in an amount equal to that excess, limited to the amount of goodwill allocated to that reporting unit.
Application of the goodwill impairment test requires judgment, including the identification of reporting units and determining the fair value of the reporting unit. We have determined that the reporting units for goodwill impairment testing are our operating segments, or components of an operating segment, that constitute a business for which discrete financial information is available. We estimate the fair value of our reporting units using a combination of an income approach, which estimates fair value based on discounted future cash flows, and a market approach, which estimates fair value based on market comparables within the utility and energy industry. These valuations require significant judgments, including, but not limited to: 1) estimates of future cash flows, based on our internal five-year business plans and adjusted as appropriate for our view of market participant assumptions, with long range cash flows estimated using a terminal value calculation; 2) estimates of long-term growth rates for our businesses; 3) the determination of an appropriate weighted-average cost of capital or discount rate; and 4) the utilization of market information such as recent sales transactions for comparable assets within the utility and energy industry. Varying by reporting unit, weighted average cost of capital in the range of 6.3% to 6.5% and long-term growth rate projections of 1.75% were utilized in the goodwill impairment test performed as of October 1, 2024. Although 1.75% was used for a long-term growth rate projection, the short-term projected growth rate is higher with planned recovery of capital investments through rider mechanisms and rate reviews. Under the market approach, we estimate fair value using multiples derived from comparable sales transactions and enterprise value to EBITDA for comparative peer companies for each respective reporting unit. These multiples are applied to operating data for each reporting unit to arrive at an indication of fair value. In addition, we add a reasonable control premium when calculating fair value utilizing the peer multiples, which is estimated as the premium that would be received in a sale in an orderly transaction between market participants.
The estimates and assumptions used in our impairment assessments are based on available market information and we believe they are reasonable. However, variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated.
For the years ended December 31, 2024, 2023, and 2022, there were no impairment losses recorded. At December 31, 2024, the fair value exceeded the carrying value at all reporting units.
See Item 1A - Risk Factors and Note 1 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for additional information.
Income Taxes
The Company and its subsidiaries file consolidated federal income tax returns. Each entity records income taxes as if it were a separate taxpayer for both federal and state income tax purposes and consolidating adjustments are allocated to the subsidiaries based on separate company computations of taxable income or loss.
The Company uses the asset and liability method in accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized at currently enacted income tax rates, to reflect the tax effect of temporary differences between the financial and tax basis of assets and liabilities as well as operating loss and tax credit carryforwards. Such temporary differences are the result of provisions in the income tax law that either require or permit certain items to be reported on the income tax return in a different period than they are reported in the financial statements.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized and provides any necessary valuation allowances as required. If we determine that we will be unable to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax asset would be made in the period such determination was made. These adjustments may increase or decrease earnings. Although we believe our assumptions, judgments, and estimates are reasonable, changes in tax laws or our interpretations of tax laws and the resolution of current and any future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.
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See Note 15 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for additional information.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our activities in the regulated and non-regulated energy industries expose us to a number of risks in the normal operations of our businesses. Depending on the activity, we are exposed to varying degrees of market risk and credit risk.
Market risk is the potential loss that may occur as a result of an adverse change in market price, rate or supply. We are exposed, but not limited to, the following market risks:
•
Commodity price risk associated with our retail natural gas services, wholesale electric power marketing activities and fuel procurement for several of our gas-fired generation assets. Market fluctuations may occur due to unpredictable factors such as weather, wildfires, geopolitical events, pandemics, market speculation, recession, inflation, pipeline constraints, and other factors that may impact natural gas and electric energy supply and demand; and
•
Interest rate risk associated with future debt, including reduced access to liquidity during periods of extreme capital markets volatility.
Credit risk is associated with financial loss resulting from non-performance of contractual obligations by a counterparty.
To manage and mitigate these identified risks, we have adopted the Black Hills Corporation Risk Policies and Procedures. The Black Hills Corporation Risk Policies and Procedures have been approved by our Executive Risk Committee. These policies relate to numerous matters including governance, control infrastructure, authorized commodities and trading instruments, prohibited activities, and employee conduct. We report significant issues or concerns pertaining to the Risk Policies and Procedures to the Audit Committee of our Board of Directors. The Executive Risk Committee, which includes senior level executives, meets at least quarterly and as necessary, to review our business and credit activities and to ensure that these activities are conducted within the authorized policies.
Commodity Price Risk
Electric and Gas Utilities
Our Utilities have various provisions that allow them to pass the prudently-incurred cost of energy through to the customer. To the extent energy prices are higher or lower than amounts in our current billing rates, adjustments are made on a periodic basis to reflect billed amounts to match the actual energy cost we incurred. In Colorado, South Dakota, and Wyoming, we have ECA or PCA provisions that adjust electric rates when energy costs are higher or lower than the costs included in our tariffs. In Arkansas, Colorado, Iowa, Kansas, Nebraska, and Wyoming, we have GCA provisions that adjust natural gas rates when our natural gas costs are higher or lower than the energy cost included in our tariffs. These adjustments are subject to periodic prudence reviews by the state regulatory commissions. If state regulatory commissions decide to discontinue these tariff-based adjustment mechanisms, or there are delays in the timing of recovery under these mechanisms, we may be more exposed to commodity price risk.
The operations of our Utilities, including natural gas sold by our Gas Utilities and natural gas used by our Electric Utilities’ generation plants or those plants under PPAs where our Electric Utilities must provide the generation fuel (tolling agreements), expose our utility customers to natural gas price volatility. Therefore, as allowed or required by state regulatory commissions, we have entered into commission-approved hedging programs utilizing natural gas futures, options, over-the-counter swaps, and basis swaps to reduce our customers’ underlying exposure to these fluctuations.
For our regulated Utilities’ hedging plans, unrealized and realized gains and losses, as well as option premiums and commissions on these transactions are recorded as Regulatory assets or Regulatory liabilities in the accompanying Consolidated Balance Sheets in accordance with the state utility commission guidelines. When the related costs are recovered through our rates, the hedging activity is recognized in the Consolidated Statements of Income. See additional information in Note 9 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Wholesale Power
There is a potential risk that our wholesale power sales could exceed our current generating capacity, which may arise from unplanned plant outages or from unanticipated load demands. To manage such risk, we restrict wholesale off-system sales to amounts by which our anticipated generating capabilities and purchased power resources exceed our anticipated load requirements plus a required reserve margin.
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Black Hills Energy Services
Through our non-regulated natural gas commodity supplier, we buy and sell natural gas in Nebraska and Wyoming at competitive prices by managing commodity price risk. As a result of these activities, this area of our business is exposed to risks associated with changes in the market price of natural gas. We manage our exposure to such risks using over-the-counter and exchange traded options and swaps with counterparties in anticipation of forecasted purchases and sales. A portion of our over-the-counter swaps have been designated as cash flow hedges to mitigate the commodity price risk associated with fixed price forward contracts to supply gas to our Choice Gas Program customers. The gain or loss on these designated derivatives is reported in AOCI in the accompanying Consolidated Balance Sheets and reclassified into earnings in the same period that the underlying hedged item is recognized in earnings.
At December 31, 2024, and 2023, a 10% change in market prices for our derivative instruments would not materially impact pre-tax income, the fair values of our derivative assets and liabilities, or OCI.
See additional commodity risk and derivative information in Note 9 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Interest Rate Risk
Periodically, we have engaged in activities to manage risks associated with changes in interest rates. We have utilized pay-fixed interest rate swap agreements to reduce exposure to interest rate fluctuations associated with floating rate debt obligations and anticipated debt refinancings. At December 31, 2024, we had no interest rate swaps in place. Further details of past swap agreements are set forth in Note 9 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
At December 31, 2024, 96.9% of our debt is fixed rate debt, which limits our exposure to variable interest rate fluctuations. A hypothetical 100 basis point increase in the benchmark rate on our variable rate debt would have increased annual pretax interest expense by approximately $0.3 million and $0.9 million for the years ended December 31, 2024, and 2023, respectively. See Note 8 for further information on cash amounts outstanding under short- and long-term variable rate borrowings.
We are subject to interest rate risk associated with our pension and post-retirement benefit obligations. Changes in interest rates impact the liabilities associated with these benefit plans as well as the amount of income or expense recognized for these plans. Declines in the value of the plan assets could diminish the funded status of the pension plans and potentially increase the requirements to make cash contributions to these plans. See additional information in Note 13 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Credit Risk
We have adopted the Black Hills Corporation Credit Policy that establishes guidelines, controls and limits to manage and mitigate credit risk within risk tolerances established by the Board of Directors. We attempt to mitigate our credit exposure by conducting business primarily with high credit quality entities, setting tenor and credit limits commensurate with counterparty financial strength, obtaining master netting agreements, and mitigating credit exposure with less creditworthy counterparties through parental guarantees, cash collateral requirements, letters of credit and other security agreements.
We perform periodic credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current creditworthiness, as determined by review of their current credit information. We maintain a provision for estimated credit losses based upon historical experience, changes in current market conditions, expected losses, and any specific customer collection issue that is identified.
See more information in Notes 1 and 9 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2024, based on the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission “COSO”. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on our evaluation, we have concluded that our internal control over financial reporting was effective as of December 31, 2024.
Deloitte & Touche LLP, an independent registered public accounting firm, as auditors of Black Hills Corporation’s financial statements, has issued an attestation report on the effectiveness of Black Hills Corporation's internal control over financial reporting as of December 31, 2024. Deloitte & Touche LLP's report on Black Hills Corporation's internal control over financial reporting is included herein.
Black Hills Corporation
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Black Hills Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Black Hills Corporation and subsidiaries (the "Company") as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 12, 2025, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Regulatory Accounting – Impact of Rate Regulation on the Financial Statements – Refer to Notes 1 and 2 to the Financial Statements
Critical Audit Matter Description
The Company is subject to cost-of-service regulation and earnings oversight by state and federal utility commissions (collectively, the “Commissions”), which have jurisdiction over the Company’s electric rates in Colorado, Montana, South Dakota and Wyoming and natural gas rates in Arkansas, Colorado, Iowa, Kansas, Nebraska, and Wyoming. Management has determined it meets the requirements under accounting principles generally accepted in the United States of America to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, such as property, plant, and equipment; regulatory assets and liabilities; revenue; operating expenses; and income tax benefit (expense).
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Rates are regulated on a state-by-state basis by the relevant state regulatory commissions based on an analysis of the Company’s costs, as reviewed and approved in a regulatory proceeding. Rate regulation is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital. Decisions to be made by the Commissions in the future will impact the accounting for regulated operations, including decisions about the amount of allowable costs and return on invested capital included in rates and any refunds that may be required. While the Company has indicated its regulatory assets are probable of recovery in current rates or in future proceedings, there is a risk that the Commissions will not judge all costs to have been prudently incurred or that the rate regulation process in which rates are determined will not always result in rates that produce a full recovery of costs and the return on invested capital.
We identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, and (2) a refund or future rate reduction to be provided to customers. Given the uncertainty of future decisions by the Commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.
Our audit procedures related to the uncertainty of future decisions by the Commissions included the following, among others:
•
We tested the effectiveness of management’s controls over the evaluation of the likelihood of (1) the recovery in future rates of costs incurred as property, plant, and equipment and deferred as regulatory assets, and (2) refunds or future reductions in rates that should be reported as regulatory liabilities. We tested the effectiveness of management’s controls over the initial recognition of amounts as property, plant, and equipment; regulatory assets or liabilities; and the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or of a future reduction in rates.
•
We read relevant regulatory orders issued by the Commissions, filings made by the Company, and other publicly available information, as appropriate, to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions’ treatment of similar costs under similar circumstances. We evaluated the external information and compared it to the Company’s recorded regulatory asset and liability balances for completeness and for any evidence that might contradict management’s assertions.
•
We obtained and evaluated an analysis from management regarding probability of recovery for regulatory assets or refund or future reduction in rates for regulatory liabilities not yet addressed in a regulatory order, as applicable, to assess management’s assertion that amounts are probable of recovery or of a future reduction in rates.
•
We inspected minutes of the board of directors to identify any evidence that may contradict management’s assertions regarding probability of recovery or refunds. We also inquired of management regarding current year rate filings and new regulatory assets or liabilities.
•
We evaluated the Company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 12, 2025
We have served as the Company's auditor since 2002.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Black Hills Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Black Hills Corporation and subsidiaries (the "Company") as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2024, of the Company and our report dated February 12, 2025, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 12, 2025
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BLACK HILLS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
Operating expenses:
Fuel, purchased power and cost of natural gas sold 730.3 982.9 1,230.6
Other income (expense):
Interest expense incurred net of amounts capitalized (195.2 ) (180.0 ) (162.6 )
Other income (expense), net (1.4 ) (3.2 ) 1.8
Net income attributable to non-controlling interest (10.6 ) (13.8 ) (12.4 )
Earnings per share of common stock:
Weighted average common shares outstanding:
The accompanying Notes to Consolidated Financial Statements are an integral part of these Consolidated Financial Statements.
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BLACK HILLS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
Other comprehensive income (loss), net of tax:
Derivative instruments designated as cash flow hedges:
Other comprehensive income (loss), net of tax 5.4 0.8 4.5
Comprehensive income available for common stock $ 278.5 $ 263.0 $ 262.9
See Note 11 for additional disclosures related to Comprehensive Income.
The accompanying Notes to Consolidated Financial Statements are an integral part of these Consolidated Financial Statements.
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BLACK HILLS CORPORATION
CONSOLIDATED BALANCE SHEETS
As of
(in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 16.1 $ 86.6
Restricted cash and equivalents 7.3 6.4
Income tax receivable, net 19.8 18.5
Less accumulated depreciation and depletion (1,936.6 ) (1,797.9 )
Total property, plant and equipment, net 7,629.9 7,119.3
Other assets:
Intangible assets, net 7.6 8.4
Regulatory assets, non-current 272.9 304.4
Other assets, non-current 70.4 62.2
The accompanying Notes to Consolidated Financial Statements are an integral part of these Consolidated Financial Statements.
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BLACK HILLS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Continued)
As of
(in millions, except share amounts)
LIABILITIES AND EQUITY
Current liabilities:
Derivative liabilities, current 4.2 6.5
Regulatory liabilities, current 94.1 98.9
Notes payable 133.8 —
Current maturities of long-term debt — 600.0
Long-term debt, net of current maturities 4,250.2 3,801.2
Deferred credits and other liabilities:
Deferred income tax liabilities, net 625.1 548.0
Regulatory liabilities, non-current 474.6 467.7
Other deferred credits and other liabilities 201.2 188.7
Total deferred credits and other liabilities 1,423.8 1,328.3
Commitments, contingencies and guarantees (Note 3)
Equity:
Stockholders’ equity -
Accumulated other comprehensive income (loss) (9.4 ) (14.8 )
Non-controlling interest 83.7 90.5
The accompanying Notes to Consolidated Financial Statements are an integral part of these Consolidated Financial Statements.
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BLACK HILLS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Operating activities:
Deferred financing cost amortization 10.7 10.1 9.8
Other adjustments, net (4.1 ) 2.7 (4.7 )
Change in certain operating assets and liabilities:
Materials, supplies and fuel 13.2 51.4 (75.4 )
Accounts receivable and other current assets (25.7 ) 204.5 (184.5 )
Accounts payable and other current liabilities 28.8 (109.9 ) 89.4
Other operating activities, net (21.2 ) (27.9 ) (15.1 )
Investing activities:
Property, plant and equipment additions (744.2 ) (555.6 ) (604.4 )
Other investing activities (1.8 ) 18.9 0.5
Net cash (used in) investing activities (746.0 ) (536.7 ) (603.9 )
Financing activities:
Long-term debt - repayments (600.0 ) (525.0 ) —
Distributions to non-controlling interests (17.4 ) (18.3 ) (17.4 )
Other financing activities (8.4 ) (13.0 ) 0.9
Net cash provided by (used in) financing activities (42.9 ) (341.7 ) 32.3
Net change in cash, restricted cash and cash equivalents (69.6 ) 66.0 13.2
Cash, restricted cash and cash equivalents beginning of year 93.0 27.0 13.8
Cash, restricted cash and cash equivalents end of year $ 23.4 $ 93.0 $ 27.0
Supplemental cash flow information:
Cash (paid) received during the period:
Interest (net of amounts capitalized) $ (174.4 ) $ (157.3 ) $ (152.5 )
Income taxes net of transferred tax credits (Note 15) $ 14.4 $ (1.0 ) $ 0.8
Non-cash investing and financing activities:
The accompanying Notes to Consolidated Financial Statements are an integral part of these Consolidated Financial Statements.
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BLACK HILLS CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
Common Stock Treasury Stock
(in millions except share amounts)
Other comprehensive income, net of tax — — — — — — 4.5 — 4.5
Dividends on common stock ($2.41 per share) — — — — — (156.7 ) — — (156.7 )
Issuance costs — — — — (1.1 ) — — — (1.1 )
Distributions to non-controlling interest — — — — — — — (17.4 ) (17.4 )
Other comprehensive income, net of tax — — — — — — 0.8 — 0.8
Dividends on common stock ($2.50 per share) — — — — — (168.1 ) — — (168.1 )
Issuance costs — — — — (1.7 ) — — — (1.7 )
Distributions to non-controlling interest — — — — — — — (18.3 ) (18.3 )
Other comprehensive income, net of tax — — — — — — 5.4 — 5.4
Dividends on common stock ($2.60 per share) — — — — — (182.3 ) — — (182.3 )
Issuance costs — — — — (2.0 ) — — — (2.0 )
Distributions to non-controlling interest — — — — — — — (17.4 ) (17.4 )
The accompanying Notes to Consolidated Financial Statements are an integral part of these Consolidated Financial Statements.
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BLACK HILLS CORPORATION
Notes to Consolidated Financial Statements
December 31, 2024, 2023, and 2022
(1) BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
Business Description