BKH

Business Context and Reporting Period

Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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 and Gas, Power Generation, Coal Mining, and Energy Marketing). The reporting period includes the full impact of the July 2008 acquisition of Aquila's regulated utilities (Black Hills Energy) and the divestiture of seven Independent Power Producer (IPP) plants, which are reported as discontinued operations.

Key Financial Metrics

Note: Total Debt calculated as Notes Payable ($479.8M) + Current Maturities ($32.1M) + Long-term Debt ($471.2M) for Q1 2009.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 187% to $437.9 million, primarily driven by the inclusion of the acquired Aquila utilities (Gas and Electric) which were not present in the Q1 2008 comparative period.
• Profitability: Net income increased 57% to $26.4 million. Diluted EPS rose to $0.68 from $0.44.
• Segment Performance:
  • Utilities Group: Income from continuing operations increased significantly due to the new Gas Utilities segment ($17.3M income) and rate increases in Electric Utilities.
  • Oil and Gas: Reported a loss of $25.7 million (vs. $2.6M income in 2008) due to a $43.3 million non-cash ceiling test impairment charge driven by lower commodity prices and a 37% decrease in average hedged oil prices.
  • Power Generation: Income increased $18.0 million, largely due to a $16.9 million after-tax gain on the sale of a 23.5% interest in the Wygen I power plant.
• Unusual Items:
  • Impairment: $43.3 million pre-tax impairment of long-lived assets (Oil and Gas).
  • Gain on Sale: $26.0 million pre-tax gain on the sale of operating assets (Wygen I partial sale).
  • Interest Rate Swaps: $14.8 million pre-tax unrealized gain on interest rate swaps not designated as hedges.

Guidance, Outlook, and Risks

• Capital Expenditures: Total 2009 capital expenditures are forecasted at approximately $313.5 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 expenditures due to the global credit crisis and may defer some projects.
• Refinancing Needs: The company expects to refinance the $382.8 million Acquisition Facility (maturing Dec 2009) in the second or fourth quarter of 2009. Success depends on credit market conditions and maintaining credit ratings.
• Liquidity: As of March 31, 2009, the company had $121.6 million in unrestricted cash and $371.3 million in available capacity on its revolving credit facility. The company is in compliance with all debt covenants.
• Risks:
  • Commodity Prices: Continued low natural gas and crude oil prices impact the Oil and Gas segment and may reduce development capital.
  • Regulatory: Pending rate case approvals (e.g., Iowa Gas) and potential changes in regulatory orders could impact cash flows.
  • Market Risk: Exposure to interest rate fluctuations and foreign currency exchange rates (Canadian dollar) for energy marketing.

Investor Verification Checklist

• Impairment Charge: Verify the impact of the $43.3 million non-cash ceiling test impairment on the Oil and Gas segment's future valuation and cash flow projections.
• Refinancing Timeline: Monitor the company's ability to refinance the $382.8 million Acquisition Facility before its December 2009 maturity, given tight credit markets.
• Wygen III Construction: Track progress and cost overruns on the Wygen III power plant, a major component of the 2009 capital budget ($62.1M share).
• Interest Rate Swaps: Assess the volatility risk associated with the $14.8 million unrealized gain on interest rate swaps, which could reverse if rates change.
• Regulatory Approvals: Confirm the status of pending rate cases, specifically the Iowa Gas settlement, to ensure expected revenue recovery.