Business Context and Reporting Period
Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2006
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 (coal mining, oil and gas, energy marketing, and power generation). The company completed the sale of its crude oil marketing and transportation business in March 2006, reclassifying it as discontinued operations.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2006 | Q1 2005 |
|---|---|---|
| Operating Revenues | $171,890 | $142,420 |
| Operating Income | $39,369 | $33,271 |
| Income from Continuing Operations | $18,561 | $15,254 |
| Income from Discontinued Operations | $7,590 | $486 |
| Net Income | $26,151 | $15,740 |
| Diluted EPS (Total) | $0.78 | $0.48 |
| Cash Provided by Operating Activities | $73,397 | $110,501 |
| Cash Used in Investing Activities | $(46,975) | $(97,021) |
| Long-Term Debt (net of current) | $665,373 | $756,544 |
| Cash and Cash Equivalents | $42,150 | $60,107 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 21% ($29.5 million) year-over-year, driven by a full quarter of activity from the Cheyenne Light acquisition, higher energy marketing margins, and higher oil and gas prices.
- Profitability: Net income increased 66% to $26.2 million. This was significantly boosted by a $7.6 million gain from discontinued operations (sale of crude oil marketing assets), compared to $0.5 million in the prior year.
- Cash Flow: Operating cash flow decreased 34% ($37.1 million) primarily due to a $31.3 million decrease in working capital changes (specifically lower cash received from natural gas sales held in storage) and a $5.8 million decrease in net changes in derivative assets/liabilities.
- Segment Performance:
- Energy Marketing: Income from continuing operations increased $4.9 million due to higher realized and unrealized gas marketing margins.
- Power Generation: Income decreased 46% due to scheduled and unscheduled plant outages at Las Vegas facilities.
- Oil and Gas: Income increased 9% due to higher commodity prices ($6.98/Mcf for gas vs. $5.36/Mcf prior year).
Guidance, Outlook, and Risks
- Capital Expenditures: The company expects 2006 capital expenditures to approximate $302.2 million, including acquisition costs for Koch Exploration assets and construction of the Wygen II coal-fired power plant (expected commercial operation early 2008).
- Dividends: Quarterly dividend increased to $0.33 per share (3.0% increase from 2005 levels).
- Liquidity: The company maintains a $400 million revolving credit facility with $250.4 million remaining capacity as of March 31, 2006. Consolidated net worth was $757.6 million, exceeding bank facility requirements by $102.9 million.
- Acquisitions: Completed acquisition of oil and gas assets from Koch Exploration Company, LLC for approximately $51.4 million on March 17, 2006.
- Risks: Key risks include volatility in energy commodity prices, plant outages affecting power generation revenue, regulatory cost recovery challenges, and the ability to secure financing for future projects. The company's credit rating outlook is negative (S&P affirmed BBB-).
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings given the $7.6 million gain from the sale of the crude oil marketing business, which is a non-recurring item.
- Power Generation Outages: Confirm the status and financial impact of the Las Vegas I and II plant outages and the timeline for the conversion to combined-cycle operation.
- Working Capital Fluctuations: Monitor the natural gas inventory levels and the timing of sales, as holding inventory for future seasons significantly impacted Q1 operating cash flow.
- Debt Covenants: Review the company's compliance with the recourse leverage ratio (0.65 to 1.00) and interest coverage ratio (2.5 to 1.0) under the revolving credit facility.
- Wygen II Project: Track the progress and cost overruns, if any, for the Wygen II coal-fired plant construction scheduled for 2008.