Black Hills Corporation — Q2 2015 Form 10-Q
Business context and reporting period
Black Hills Corporation is a U.S. energy company with regulated electric and gas utilities and non-regulated power generation, coal mining, and oil and gas operations. This unaudited filing covers the quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $272.3 million | $283.2 million | $714.2 million | $743.4 million |
| Operating income (loss) | ($38.9 million) | $47.4 million | $31.6 million | $137.8 million |
| Net income (loss) | ($41.8 million) | $20.3 million | ($8.0 million) | $69.0 million |
| Diluted earnings (loss) per share | ($0.94) | $0.46 | ($0.18) | $1.55 |
| Cash from operating activities | — | — | $254.4 million | $173.8 million |
- Revenue declined about 4% in both comparison periods. The Q2 operating loss principally reflected a $94.5 million non-cash oil and gas asset impairment; the six-month impairment was $116.5 million. The company also recorded a $5.2 million non-cash impairment of an oil and gas equity investment.
- At June 30, cash and cash equivalents were $87.2 million, current assets $438.6 million, and current liabilities $358.5 million. Notes payable were $105.8 million and long-term debt was $1.568 billion, with no current maturities shown. Total debt on those balance-sheet lines was approximately $1.673 billion.
- Six-month capital expenditures for property, plant and equipment were $206.5 million, versus $177.3 million a year earlier. Common dividends paid were $36.3 million, or $0.81 per share. The board declared a subsequent quarterly dividend of $0.405 per share.
- The $500 million revolving credit facility was extended to June 2020. At quarter-end, $105.8 million was borrowed, $23.1 million of letters of credit was outstanding, and reported available capacity was $371 million. The company reported compliance with its debt covenant; its recourse leverage ratio was 57% against a 65% limit.
Material changes versus the prior period
- Oil and gas results deteriorated sharply: the segment reported a $71.2 million Q2 net loss and a $90.3 million six-month net loss, compared with losses of $1.1 million and $2.6 million, respectively, in 2014. Lower commodity prices outweighed higher production. Average hedged prices received for oil and gas fell 17% and 44% in Q2; production increased 32%.
- Utilities’ six-month net income rose to $62.0 million from $52.7 million. Electric Utilities benefited from improved margins and returns on additional generating-facility investment. Gas Utilities’ six-month income declined to $25.4 million from $26.7 million, with milder weather reducing margins.
- Power Generation and Coal Mining reported higher six-month net income: $15.7 million and $6.1 million, respectively, compared with $15.3 million and $4.5 million.
- Operating cash flow increased by $80.6 million year over year, principally reflecting improved working-capital movements, including lower gas inventory and receivables. Investing cash outflow also increased, mainly because of higher capital spending.
Outlook, risks, contingencies, and unusual items
- SourceGas acquisition: On July 12, 2015, the company agreed to acquire SourceGas for approximately $1.89 billion, including projected capital expenditures through closing and approximately $720 million of assumed debt. The estimated effective purchase price is $1.74 billion after approximately $150 million of tax benefits. Closing is expected in the first half of 2016, subject to regulatory and other approvals. Planned funding includes assumed debt, $450–$550 million of new debt, $575–$675 million of equity or equity-linked securities, and cash or revolver borrowings. A $1.17 billion bridge facility was subsequently committed. Moody’s and Fitch revised the company’s outlook to negative after the announcement; S&P maintained a stable outlook.
- Capital plans: Planned 2015 capital expenditures were $498.8 million; 2016 and 2017 plans were $357.3 million and $335.2 million, respectively, and exclude SourceGas. Oil and gas capital plans were cut substantially for 2016 and 2017 because of expected low commodity prices. Management warned that further oil and gas ceiling-test impairments could occur in 2015 if prices remain near current levels. No consolidated earnings guidance is provided in the supplied filing text.
- Controls and accounting: Management concluded disclosure controls were ineffective at June 30, 2015 and identified a material weakness in the oil and gas full-cost ceiling-test impairment process, related to training and tax accounting. Remediation includes employee training, model improvements, and planned external review. The company also corrected prior-period oil and gas accounting errors, which it concluded were immaterial to previously issued statements.
- Litigation: Claims arising from the 2012 Oil Creek fire include approximately $55 million of asserted damages. The company recorded a liability for its estimate of probable settlement and litigation costs and a receivable for insurance recoveries it considers probable; the accrued amount is not stated here. Potential losses beyond the accrual are reasonably possible but not reasonably estimable. Management does not expect a material adverse effect on consolidated financial condition, results, or cash flows.
- Results are seasonal: electric demand typically peaks in summer and gas demand in winter. The filing cautions that interim results may not indicate full-year performance. Commodity prices, regulatory approvals, financing access, weather, and acquisition integration are key uncertainties.
Important facts for investors to verify
- Whether low oil and gas prices trigger additional ceiling-test impairments, and how they affect production economics and planned spending.
- SourceGas regulatory approvals, final purchase-price adjustments, financing mix, leverage, and credit-rating implications.
- Progress in remediating the material weakness and whether subsequent ceiling-test calculations are reliable.
- The final exposure, insurance recovery, and accrued liability for the Oil Creek fire claims.
- Whether planned utility capital projects and rate recovery proceed on schedule and support cash flow and dividends.