Business Context and Reporting Period
Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: A diversified energy company operating in the United States with two major business groups: Retail Services (electric and gas utilities) and Wholesale Energy (oil and gas production, power generation, coal mining, and energy marketing).
Key Financial Metrics
| Metric (in thousands, except per share) | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Operating Revenues | $162,354 | $512,830 |
| Operating Income | $32,558 | $133,829 |
| Net Income | $17,464 | $75,016 |
| Diluted EPS (Total) | $0.46 | $2.02 |
| Cash Provided by Operating Activities | N/A | $205,731 |
| Cash Used in Investing Activities | N/A | $(160,313) |
| Cash and Cash Equivalents (Sep 30, 2007) | $81,201 | $81,201 |
| Total Debt (Current + Long-term) | $609,517 | $609,517 |
Note: Total Debt calculated as Current maturities of long-term debt ($143,380) + Notes payable ($96,648) + Long-term debt net of current maturities ($466,137) + Short-term promissory note ($29,100 net book value, $30,000 face value).
Material Changes vs. Prior Period
- Quarterly Results (3 Months): Net income decreased to $17.5 million ($0.46/share) from $22.3 million ($0.66/share) in the prior year quarter. This decline was driven by lower earnings in the Wholesale Energy group, specifically a $4.2 million decrease in Power Generation earnings due to impairment charges and a $1.0 million decrease in Oil and Gas earnings due to higher depletion expenses.
- Year-to-Date Results (9 Months): Net income increased to $75.0 million ($2.02/share) from $60.2 million ($1.80/share) in the prior year. This growth was driven by increased earnings in Retail Services and Wholesale Energy, particularly an $11.3 million increase in Energy Marketing earnings and a $4.3 million increase in Electric Utility earnings.
- Revenue Growth: Operating revenues increased 3% quarter-over-quarter and 6% year-to-date, driven by higher energy marketing margins, increased oil prices, and higher coal production, partially offset by lower off-system sales in the utility segment.
- Impairment Charges: The company recorded a $2.7 million impairment charge in the third quarter related to the Ontario power plant due to contract expiration without extension.
Guidance, Outlook, and Risks
- Pending Acquisitions: The company is pursuing the acquisition of Aquila's regulated electric and gas utility assets for approximately $940 million. Regulatory approvals have been obtained in Iowa, Nebraska, and Colorado (electric), with antitrust clearance from the FTC. A $1.0 billion Acquisition Facility has been secured to fund the transaction.
- Capital Projects:
- Valencia Project: A 149 Mw gas turbine facility in New Mexico with a commercial operation date of June 2008. Failure to meet this date could result in significant delay damages.
- Wygen II: A 90 Mw power plant expected to be in service by January 1, 2008.
- Dividends: The Board increased the quarterly dividend to $0.35 per share (effective November 1, 2007), a 2.9% increase from the previous rate.
- Legal and Regulatory Risks:
- FERC Investigation: The company identified potential noncompliance in natural gas marketing activities and notified FERC. While a reserve has been established, the final penalty amount is uncertain.
- Litigation: Ongoing earn-out litigation with former Indeck stockholders and an arbitration with Nevada Power regarding fuel supply obligations at the Las Vegas Cogeneration plant.
- Market Risk: Earnings are subject to volatility from commodity prices (natural gas, crude oil) and interest rates. The company utilizes derivatives to hedge these risks, but accounting rules (SFAS 133) can cause volatility in reported earnings due to mark-to-market adjustments on derivatives that are not fully offset by inventory adjustments.
Investor Verification Checklist
- Aquila Acquisition Status: Verify the final closing date and any remaining regulatory hurdles for the $940 million Aquila asset purchase.
- Valencia Project Timeline: Monitor construction progress to ensure the June 2008 in-service date is met to avoid delay damages.
- FERC Penalty Resolution: Track the outcome of the FERC compliance investigation to determine if the current reserve is sufficient.
- Ontario Plant Disposition: Confirm the status of the Ontario power plant following the impairment charge and contract expiration.
- Debt Refinancing: Verify the refinancing of the $128.3 million Wygen I debt maturing in June 2008 and the issuance of the $110 million First Mortgage Bonds by Cheyenne Light.