Business Context and Reporting Period
Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: A diversified energy company operating in the United States with two primary business groups: Utilities (Electric and Gas) and Non-regulated Energy (Oil & Gas, Power Generation, Coal Mining, and Energy Marketing). The company completed the acquisition of Aquila's regulated utilities in July 2008, which are now reported as Black Hills Energy.
Key Financial Metrics (Six Months Ended June 30, 2009)
| Metric | 2009 (in thousands) | 2008 (in thousands) |
|---|---|---|
| Operating Revenues | $695,292 | $306,123 |
| Net Income Available for Common Stock | $50,972 | $38,988 |
| Income from Continuing Operations | $50,206 | $25,020 |
| Earnings Per Share (Diluted) | $1.32 | $1.01 |
| Cash Provided by Operating Activities | $246,240 | $41,260 |
| Cash and Cash Equivalents (End of Period) | $122,351 | $40,808 |
| Total Debt (Current + Long-term) | $1,021,829 | $1,287,431 |
| Dividends Paid Per Share | $0.710 | $0.700 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 127% year-over-year, primarily driven by the inclusion of the Aquila utility acquisitions (Colorado Electric and Gas Utilities) which were not present in the 2008 comparative period.
- Profitability: Net income increased 31% to $51.0 million. Income from continuing operations more than doubled to $50.2 million.
- Segment Performance:
- Utilities: Earnings increased due to the Aquila acquisition and approved rate increases, partially offset by lower margins on off-system sales and higher interest expense.
- Oil and Gas: Earnings decreased significantly ($35.3 million) due to a $43.3 million non-cash ceiling test impairment charge and lower commodity prices (oil down 40%, gas down 40%).
- Power Generation: Earnings increased $19.3 million, largely due to a $16.9 million after-tax gain on the sale of a 23.5% interest in the Wygen I plant.
- Corporate: Income increased $28.1 million, driven by a $30.2 million after-tax unrealized mark-to-market gain on interest rate swaps.
- Cash Flow: Operating cash flow surged $205 million, aided by working capital changes (specifically decreased purchases of fuel and materials) and the non-cash impairment charge.
Guidance, Outlook, and Risks
- Capital Expenditures: Total 2009 capital expenditures are forecasted at approximately $365.8 million. This includes $62.1 million for the Wygen III power plant and $38.6 million for Oil and Gas development. Management noted they are re-evaluating forecasted expenditures due to the global credit crisis and may defer some projects.
- Financing: The company issued $250 million in senior unsecured notes in May 2009 to pay down the Acquisition Facility. They plan to issue approximately $180 million in first mortgage bonds in Fall 2009 to fund utility capital expenditures and refinance maturing debt.
- Dividends: A quarterly dividend of $0.355 per share was declared on July 29, 2009. Future dividends depend on financial condition and credit facility restrictions.
- Risks and Contingencies:
- Commodity Prices: Continued low oil and gas prices could trigger further impairment charges and reduce development capital.
- Regulatory/Environmental: Potential federal climate change legislation (e.g., cap-and-trade) and state renewable portfolio standards could increase generation costs and require significant capital investment.
- Interest Rate Swaps: The company holds $250 million in interest rate swaps not designated as hedges. Mark-to-market adjustments on these swaps resulted in a $46.5 million gain in the first half of 2009; future rate changes could significantly impact earnings.
- FERC Investigation: An ongoing compliance investigation regarding natural gas marketing activities; management believes reserves are adequate but outcomes are uncertain.
Investor Verification Checklist
- Impairment Charges: Verify the sustainability of the Oil and Gas segment given the $43.3 million ceiling test impairment and the sensitivity of future earnings to commodity price fluctuations.
- Interest Rate Swap Volatility: Assess the impact of the $250 million non-hedge interest rate swaps on future earnings volatility as market rates change.
- Debt Refinancing: Monitor the successful execution of the planned $180 million bond issuance in Fall 2009 to refinance short-term debt and fund capital projects.
- Capital Expenditure Deferrals: Watch for announcements regarding the deferral of the $365.8 million planned capital program due to credit market conditions.
- Regulatory Outcomes: Track the resolution of the FERC compliance investigation and the impact of pending climate change legislation on utility rate cases.