Business Context and Reporting Period
Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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 (Six Months Ended June 30, 2007)
| Metric | 2007 (in thousands) | 2006 (in thousands) |
|---|---|---|
| Operating Revenues | $350,476 | $325,704 |
| Operating Income | $101,271 | $71,799 |
| Income from Continuing Operations | $57,732 | $30,929 |
| Net Income | $57,551 | $37,908 |
| Diluted EPS (Continuing Ops) | $1.57 | $0.92 |
| Net Cash Provided by Operating Activities | $85,145 | $106,646 |
| Net Cash Used in Investing Activities | $(112,189) | $(107,032) |
| Net Cash Provided by Financing Activities | $29,714 | $13,077 |
| Total Debt (Long-term + Current) | $612,770 | $677,253 |
| Cash and Cash Equivalents | $40,172 | $42,234 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 8% ($24.8 million) year-over-year, driven primarily by higher margins in energy marketing, improved power generation revenues, and higher oil/gas prices and volumes.
- Profitability Surge: Income from continuing operations increased 87% ($26.8 million). Key drivers included:
- Energy Marketing: $11.1 million increase due to higher realized margins and unrealized gains from natural gas volatility.
- Power Generation: $5.9 million increase due to improved plant availability (Las Vegas facilities returned to service) and lower interest costs.
- Electric Utility: $4.2 million increase due to rate increases effective Jan 1, 2007, and lower maintenance costs (Wyodak plant fully operational vs. outage in 2006).
- Operating Expenses: Decreased 2% ($4.7 million) despite higher compensation and depreciation, offset by significantly lower fuel and purchased power costs.
- Capital Structure: The company issued 4.17 million shares of common stock in February 2007, raising $145.6 million in net proceeds, which were used to repay debt. Total debt decreased by approximately $64.5 million compared to the prior year-end.
Guidance, Outlook, and Risks
Outlook and Capital Projects
- Aquila Acquisition: Entered a definitive agreement to acquire Aquila's regulated electric and gas utilities for $940 million. A $1.0 billion acquisition facility was secured to fund the transaction. Closing is subject to regulatory approvals.
- Valencia Project: Entered a 20-year power purchase agreement for a 149 MW gas turbine facility in New Mexico. Expected cost is $101 million with commercial operation in June 2008.
- Capital Expenditures: Expected 2007 capital expenditures to approximate $268.8 million (excluding the Aquila acquisition).
Risks and Contingencies
- Legal Proceedings:
- Indeck Earn-Out Litigation: Ongoing litigation with former Indeck stockholders; trial set for February 2008 if motions to dismiss are denied.
- Las Vegas Cogeneration Arbitration: Nevada Power filed a demand for arbitration alleging breach of fuel supply obligations. Company denies claims; resolution expected by end of 2007.
- California Anti-Trust: Enserco reached a settlement agreement regarding natural gas price manipulation allegations; amount not material.
- Market Risks: Significant exposure to commodity price volatility (natural gas, crude oil) and interest rate fluctuations. The company uses derivatives to hedge, but accounting rules (SFAS 133) can cause earnings volatility due to mark-to-market requirements on derivatives while inventory/storage positions may not be marked to market.
- Regulatory Risk: Dependence on regulatory approvals for the Aquila acquisition and cost recovery for retail utility operations.
Investor Verification Checklist
- Aquila Acquisition Status: Verify progress on regulatory approvals (FERC, state commissions) and antitrust review for the $940 million asset purchase.
- Energy Marketing Volatility: Review the reconciliation of GAAP fair value to non-GAAP forward book value to understand the impact of mark-to-market accounting on reported earnings.
- Debt Refinancing: Monitor the refinancing of the $128.3 million Wygen I project debt maturing in June 2008.
- Legal Outcomes: Track the resolution of the Indeck earn-out litigation and the Las Vegas Cogeneration arbitration.
- Valencia Project Timeline: Confirm the project remains on schedule for the June 2008 in-service date to avoid "delay damage" penalties.