Black Hills Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Black Hills is an integrated U.S. energy company with regulated electric and gas utilities and non-regulated oil and gas, power generation, and coal mining operations. Enserco, its Energy Marketing segment, was sold on February 29, 2012 and is presented as discontinued operations; comparative periods were reclassified.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $242.4 million | $260.6 million | $608.2 million | $661.5 million |
| Operating income | $20.6 million | $36.2 million | $90.6 million | $94.5 million |
| Operating margin | 8.5% | 13.9% | 14.9% | 14.3% |
| Continuing-operations income (loss) | $(12.3) million | $3.7 million | $22.9 million | $32.8 million |
| Net income (loss) | $(13.5) million | $7.8 million | $16.3 million | $34.7 million |
| Diluted EPS | $(0.31) | $0.19 | $0.37 | $0.87 |
- Q2 operating results included a $26.9 million pre-tax, non-cash oil and gas ceiling-test impairment (approximately $17.3 million after tax) and a $15.6 million pre-tax non-cash mark-to-market loss on interest-rate swaps. Six-month continuing results also included a $1.0 million after-tax write-off of prior credit-facility financing costs.
- Six-month cash from operations was $176.7 million, versus $182.0 million; continuing operations generated $155.5 million. Capital expenditures were $148.8 million. Investing cash outflow was $36.7 million, including $108.8 million of proceeds from the Enserco sale.
- At June 30, cash and cash equivalents were $40.1 million. Debt comprised $225.0 million of notes payable, $227.6 million of current long-term debt, and $1,044.9 million of long-term debt, for approximately $1.50 billion in total.
- The $500 million revolving facility had $75 million drawn and $36 million of letters of credit outstanding, leaving approximately $389 million of availability. The company reported compliance with debt covenants; its recourse leverage ratio was 56.8% against a 65% maximum.
- Common dividends paid were $0.74 per share for the six months. A $0.37-per-share quarterly dividend was declared for payment September 1, 2012.
Material changes and management commentary
- Revenue fell 7% in Q2 and 8% for the first half. Utilities revenue declined, chiefly reflecting lower gas costs and sales, while non-regulated energy revenue increased.
- Electric Utilities income improved, supported by new Colorado Electric rates and the new 180 MW Pueblo generating facility. Gas Utilities income declined as unusually warm weather reduced heating demand; first-half heating degree days were 22% below normal for the Gas Utilities.
- Oil and Gas reported a $19.6 million segment loss for the first half, mainly due to the impairment and higher depletion expense. Production volumes rose, but natural gas prices received were lower than in 2011.
- Power Generation income rose with the start of commercial operations at a new 200 MW Pueblo facility under a 20-year power purchase agreement. Coal Mining returned to profit despite lower sales volumes, helped by lower costs and a revised mine plan.
- Enserco sale proceeds were approximately $166.3 million including cash retained from the business. The buyer sought $7.2 million in purchase-price adjustments; the company disputed the request and accrued an estimated $1.3 million. Unresolved claims may proceed under the agreement’s dispute-resolution process.
Outlook, risks, and controls
- Planned capital expenditures are $355.3 million in 2012, $472.7 million in 2013, and $378.1 million in 2014. Management expects to fund capital needs through operating cash flow and debt and potentially equity financing; estimates may change with project timing, regulation, commodity economics, and market conditions.
- The company had $225 million and $250 million of debt due in 2013 and 2014, respectively, and $250 million of term loans expiring in 2013. It expected to pursue financing ahead of maturities, potentially in late 2012 or early 2013, subject to market conditions.
- Management identified commodity-price and interest-rate exposure, counterparty performance, regulatory approvals, construction execution, and access to capital markets as material risks. Low natural-gas prices may result in further oil and gas impairment charges. Gas utility results are seasonal.
- Unrealized losses on $250 million notional de-designated interest-rate swaps are recorded in earnings and can create significant period-to-period volatility. Their June 30 mark-to-market liability was $93.3 million; cash settlement could be required at amended early-termination dates if not extended.
- Disclosure controls were not effective as of June 30 because of a previously identified material weakness in income-tax accounting controls. Management said remediation was underway and that additional review supported fair presentation of the interim financial statements.
Most important facts for investors to verify
- Whether the Enserco purchase-price dispute is resolved and whether the final adjustment exceeds the $1.3 million accrual.
- Progress on remediation of the income-tax control weakness and any subsequent control-effectiveness assessment.
- Refinancing plans and terms for the 2013–2014 maturities, including the $250 million of 2013 term loans and available revolving-credit capacity.
- Capital-project spending, regulatory approvals, and whether projected expenditures or financing needs change.
- Oil and gas prices, reserve estimates, production costs, and any further full-cost ceiling-test impairment.
- Interest-rate swap valuation, extension or settlement decisions, and resulting earnings or liquidity effects.