Black Hills Unit Gets KCC Approval to Hike Rates, Shares Up - Analyst Blog

Black Hills Energy, a unit of Black Hills Corporation (BKH), has received an approval from the Kansas Corporation Commission (KCC) for increasing the natural gas base rate for Kansas customers from Jan 1, 2015. This nod will enable Black Hills Energy to boost its base revenues by an additional $5.2 million annually.

Consequently, Black Hills' share price surged around 1.1% on Dec 17 from the previous day's closing.

The main objective of this latest rate hike is to recover $51 million invested by Black Hills Energy in natural gas infrastructure projects since 2006.

This is not the first time Black Hills has employed such means to recover prior investments. In Oct 2014, the company's subsidiaries, Black Hills Power, Inc. and Cheyenne Light, Fuel and Power Company, received approvals from the Wyoming Public Service Commission (WPSC) to increase their electricity and natural gas rates, respectively.

It is quite common for utilities to recoup money invested in development of utility assets from customers by filing rate-hike requests with the respective commissions.

Positive outcomes of such filings in terms of rate hikes encourage more investments on infrastructure development, thereby improving reliability.

Black Hills has maintained a steady record by investing in expansion of its scale of operations through both organic and inorganic projects. In the first nine months of 2014, the company's capital expenditure stood at around $290 million, up about 21.3% year over year, mainly due to the development of the Cheyenne Prairie generating station. Between 2014 and 2016, the company intends to invest around $1.23 billion as capital expenditure.

As far as inorganic growth is concerned, in Nov 2014, the WPSC approved Black Hills' proposed acquisition of gas transmission and distribution utility assets from MGTC, Inc, a subsidiary of Anadarko Petroleum Corporation (APC).

Black Hills maintains a favorable liquidity position backed by a steady cash generating capacity. As of Sep 30, 2014, the company had cash and cash equivalents of around $11.9 million and availability of roughly $184 million under the revolving credit facility. Black Hills' operating cash flow in the first nine months of 2014 came in at $239.2 million. Its financial position allows the company to pursue an effective capital investment program.

Black Hills currently has a Zacks Rank #1 (Strong Buy). Other well-ranked stocks in the sector include PG&E Corporation (PCG) and ALLETE, Inc. (ALE). PG&E Corporation holds a Zacks Rank #1 (Strong Buy) while ALLETE carries a Zacks Rank #2 (Buy).