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Black Hills Corporation’s (BKH) Long-Term Issuer Default Rating (IDR) of ‘BBB+’ reflects the predictable earnings and cash flows from the company’s predominately regulated operations. The low-risk business profile, in ���������ֳ�’ opinion, can support the current ratings despite delayed progress on deleveraging because of the tax law and an elevated capital program focused on safety projects recovered through infrastructure mechanisms during the general rate case stay-out periods.

With the divestment of BKH’s unregulated exploration and production operations in 2018, nearly all of BKH’s cash flows and earnings are from regulated activities or nonregulated businesses that have long-term contracts with BKH affiliates. ���������ֳ� expects that BKH will reduce leverage to below 5.0x on a FFO-adjusted leverage basis by 2021 and the regulatory environment will remain constructive across its eight regulatory jurisdictions.

Low-Risk Business Profile: BKH benefits from ownership of several low-risk regulated utility businesses. It eliminated its higher-risk oil and gas operations in 2018 and expanded regulated operations with the acquisition of Black Hills Gas Holdings, LLC (BHGH) in 2016. The contribution of regulated utility operations increased to approximately 86% of consolidated EBITDA for the LTM ended June 30, 2019, from 80% previously. BKH is focusing on organic growth from the higher-growing gas utilities in Colorado, Wyoming and Arkansas.

Deleveraging Expected: While the BHGH acquisition and acceleration of safety-focused capital projects are pressuring BKH’s credit metrics, ���������ֳ� expects consolidated FFO-adjusted leverage to strengthen to approximately 4.7x–5.0x by 2021, bringing metrics back in line with the rating category. Deleveraging will be a function of organic growth from the integration of BHGH, completion of the elevated capital investment, timely recovery of utility investments under rate rider mechanisms and management’s commitment to a capital structure commensurate with current ratings.