Black Hills (BKH) Q2 2023: CapEx to Rise 33% in 2024 as Regulatory and Growth Pipeline Expands
Black Hills is signaling a capital allocation inflection, with 2024 CapEx set to jump to $800 million as regulatory settlements, transmission projects, and renewable resource plans converge. Management’s confidence in mid-range guidance rests on cost controls and rate recovery, while customer growth and new margin streams are poised to play a larger role in the long-term earnings mix. Investors should watch for regulatory cadence and capital plan updates at year-end, as BKH positions for a broader growth runway despite inflationary headwinds.
Summary
- Capital Allocation Shift: 2024 CapEx set for a material increase as project pipeline accelerates.
- Cost Discipline Underpins Guidance: O&M and interest expense management is critical to delivering mid-range EPS.
- Regulatory and Customer Growth Tailwinds: Rate reviews, transmission, and new customer segments drive multi-year upside potential.
Business Overview
Black Hills Corporation (BKH) is a regulated utility holding company serving over 1.3 million electric and natural gas customers across eight states in the Rocky Mountain and Midwest regions. The business model is anchored in regulated electric and gas distribution, with revenue derived from customer rates approved by state utility commissions. Major segments include electric utilities, gas utilities, and transmission infrastructure, with emerging growth in renewable natural gas (RNG) and data center energy solutions.
Performance Analysis
Black Hills’ second quarter reflected a complex mix of regulatory gains, cost inflation, and weather-driven headwinds. While new rates and rider recoveries provided a boost to utility margins, earnings were compressed by higher operating and interest expenses, as well as milder weather reducing energy demand. Notably, a one-time state income tax true-up contributed a significant benefit, but underlying results—excluding this—were pressured by 8.2% higher O&M costs, largely tied to labor and benefits inflation.
Management is actively managing controllable expenses, including hiring limits and a focus on travel and outside services, to offset inflation and deliver on guidance. Cash flow strength, driven by fuel cost recovery and new customer rates, enabled BKH to pay down all short-term debt and improve liquidity, with available credit lines and cash totaling nearly $900 million at quarter end. Equity issuance through the at-the-market (ATM) program continued, supporting balance sheet strength and credit quality objectives.
- O&M Inflation Impact: Labor and benefit costs remain sticky, necessitating regulatory recovery and cost control actions.
- Interest Expense Pressure: Higher rates elevated financing costs despite stable total debt levels.
- Regulatory Margin Levers: New rates and investment riders provided $0.09 EPS lift, partially offsetting cost headwinds.
Looking ahead, the ability to balance growth investments with disciplined cost management will define BKH’s financial trajectory, especially as capital requirements ramp in 2024 and beyond.
Executive Commentary
"We're on track with our 2023 capital plan of $615 million. We're now in the execution phase of our electric resource plans in Colorado and South Dakota to add a combined 500 megawatts of renewable resources. Those plans include ownership opportunities, representing upside to our base capital plan."
Lynn Evans, President and Chief Executive Officer
"O&M expenses increased 8.2% year-over-year, primarily driven by the inflationary impacts on labor costs and benefits. We are actively managing our expenses for the remainder of the year, including limits on hiring and controllable expenses."
Kimberly Nooney, Senior Vice President and Chief Financial Officer
Strategic Positioning
1. Regulatory Recovery and Rate Case Cadence
Regulatory settlements and proactive rate reviews are central to BKH’s earnings stability. The recent Rocky Mountain Natural Gas settlement in Colorado secured $8.2 million in new annual revenue, recovering $110 million of investment. Additional rate cases in Colorado, Wyoming, and a planned Arkansas filing target nearly $300 million in incremental investment recovery, with $46 million in new revenue requests pending.
2. Capital Plan Upshift and Transmission Buildout
Capital spending is set to rise sharply, with 2024 CapEx guided to over $800 million—up from $600 million in 2023—driven by the Ready Wyoming transmission expansion and deferred strategic projects. The base five-year capital plan stands at $3.5 billion, with upside potential from renewable resource ownership and incremental transmission opportunities.
3. Customer Growth and Margin Diversification
Organic customer growth remains robust in key territories, notably northwest Arkansas, Colorado’s Front Range, and Rapid City. BKH is also cultivating capital-light revenue streams via data centers and blockchain energy solutions, with initial blockchain customer ramp-up in Cheyenne and growing demand from hyperscale data centers.
4. Clean Energy and RNG Initiatives
Decarbonization is a strategic pillar, with a 70% electric emissions reduction target by 2040 and net zero for natural gas by 2035. Six RNG interconnects are operational, with more in development, leveraging BKH’s footprint in agriculture-rich regions. Hydrogen is being monitored as a long-term opportunity, though RNG and pipeline modernization are the primary current levers.
5. Financial Flexibility and Credit Quality
Balance sheet repair and liquidity enhancement remain priorities, as evidenced by debt refinancing, equity issuance, and improved net debt metrics. Management is keenly focused on maintaining BBB+ credit quality, with ATM equity issuance expected to total $140-160 million in 2023.
Key Considerations
This quarter marks a pivot point where Black Hills must balance near-term cost headwinds with a growing capital and regulatory pipeline. The company’s ability to recover inflation-driven costs through rates, execute on large-scale transmission and renewables projects, and develop new customer segments will shape its multi-year earnings power.
Key Considerations:
- Regulatory Timing Sensitivity: Accelerated rate cases are under evaluation to offset inflation and interest expense drag.
- Transmission and Renewables Execution: Ready Wyoming and 500 MW of renewables require disciplined project management and regulatory navigation.
- Capital-Light Growth Streams: Data center and blockchain partnerships offer margin upside without significant capital risk.
- Inflation and Cost Stickiness: Labor and external service costs are persistent, demanding ongoing O&M discipline and innovation.
- Balance Sheet Strength: Improved liquidity and equity issuance support larger CapEx needs and credit metrics.
Risks
Material risks center on regulatory lag, as inflation and interest costs outpace rate recovery, pressuring margins. Execution risk is elevated as BKH ramps up major capital projects, with potential for delays or cost overruns. Customer demand volatility, especially in new segments like data centers and blockchain, adds uncertainty to growth projections. Environmental targets may face policy or technology hurdles, particularly around hydrogen integration and RNG scale.
Forward Outlook
For Q3 and Q4 2023, BKH guided to:
- Deliver full-year EPS at the mid-point of $3.65 to $3.85 guidance, excluding the state tax benefit.
- Issue $140-160 million of equity through the ATM program to support capital needs and credit quality.
For full-year 2024, management will provide updated earnings and dividend guidance, as well as a refreshed capital plan, with expectations for:
- CapEx rising to over $800 million, driven by transmission and deferred projects.
- Dividend increase in line with long-term EPS growth (4-6%).
Management highlighted that guidance confidence is rooted in O&M controls, robust customer growth, and successful regulatory outcomes, with capital plan and margin mix updates to be detailed at year-end.
- Year-end update will align with internal financial planning and reflect regulatory and project developments.
- Potential for incremental CapEx upside from renewable resource ownership and regulatory acceleration.
Takeaways
Black Hills enters a phase of elevated investment and regulatory activity, with cost management and rate recovery as the linchpins for near-term execution and long-term value creation.
- CapEx Acceleration: The 2024 capital plan signals a new investment cycle, with transmission and renewables as key growth vectors.
- Cost and Regulatory Discipline: Achieving mid-range guidance depends on controlling O&M inflation and securing timely rate relief.
- Growth Mix Evolution: Customer expansion and capital-light initiatives are set to play a larger role in future earnings streams.
Conclusion
Black Hills is managing through inflationary and interest rate pressure with a clear focus on regulatory recovery, disciplined capital allocation, and new growth opportunities. The next phase will test execution on rising CapEx and evolving customer segments, with regulatory cadence and project delivery as primary investor watchpoints.
Industry Read-Through
Black Hills’ regulatory and capital allocation playbook reflects broader utility sector dynamics, where inflation, interest expense, and decarbonization targets drive accelerated rate cases and capital plan expansion. Transmission buildouts and renewable integration remain central themes, with customer growth in data centers and blockchain emerging as incremental margin levers for regulated utilities. Peers should note the persistent challenge of O&M inflation and the need for proactive cost controls and rate recovery to sustain earnings growth through macro volatility. Environmental targets are increasingly tied to pipeline modernization and RNG, with hydrogen as a longer-term, less certain lever.