Black Hills Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Black Hills operates regulated electric and gas utilities and non-regulated power generation, coal mining, and oil and gas businesses. Results are seasonal, particularly for gas utilities.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $272.1 million | $259.9 million | $1,015.5 million | $920.4 million |
| Operating income | $54.4 million | $55.6 million | $190.6 million | $184.4 million |
| Net income | $26.8 million | $23.1 million | $94.8 million | $96.8 million |
| Diluted EPS | $0.60 | $0.52 | $2.13 | $2.18 |
- Q3 revenue rose 4.7% and net income rose 16.1%; operating income declined 2.1%. Nine-month revenue increased 10.3%, while net income declined 2.1%.
- Q3 operating margin was approximately 20.0%, versus 21.4% a year earlier; nine-month operating margin was approximately 18.8%, versus 20.0%. Higher utility fuel and gas costs contributed to expense growth.
- Nine-month operating cash flow was $239.2 million, down from $251.8 million. Capital expenditures were $290.3 million; investing cash outflow was $270.3 million. Dividends paid were $52.2 million.
- At September 30, cash and cash equivalents were $11.9 million; current assets were $374.0 million and current liabilities $727.0 million. The $275 million corporate term loan due June 2015 was classified as current. The $500 million revolving facility had $184 million drawn, $32 million in letters of credit, and $284 million available.
- Total debt, including notes payable and current and long-term debt, was approximately $1.57 billion. The company reported a 54% recourse leverage ratio against a covenant limit below 65% and stated it was in compliance.
- Quarterly dividend declared was $0.39 per share; the board declared the same amount for payment in December, equivalent to a stated annual rate of $1.56 per share.
Changes and management commentary
- Utility segment earnings improved: nine-month utility net income increased to $72.4 million from $58.3 million. Gas Utilities benefited from colder weather and higher volumes; Electric Utilities benefited from returns on investment and industrial load growth, partly offset by milder summer weather and lower wholesale sales.
- Nine-month non-regulated energy net income increased to $23.4 million from $18.9 million. Power Generation and Coal Mining improved, while Oil and Gas losses widened to $6.8 million from $3.7 million, reflecting lower oil prices and higher depletion expense.
- The prior-year nine-month comparison included a $29.4 million non-cash mark-to-market gain on interest-rate swaps, settled in November 2013. Its absence materially affected the year-over-year comparison in corporate results.
- Interest expense fell approximately $17 million for the nine months, primarily following 2013 refinancing. Moody’s and Fitch upgraded the company’s credit ratings in 2014; both reported stable outlooks.
Outlook, developments, and risks
- No consolidated earnings-per-share guidance is provided in the supplied filing text. Management said cash on hand, operating cash flows, borrowing capacity, and access to debt and equity markets were expected to fund operations, debt maturities, dividends, and planned capital spending.
- Planned capital expenditures were $418.1 million for 2014, $432 million for 2015, and $408 million for 2016. Management noted actual spending could vary, including with acquisitions and other growth opportunities.
- Cheyenne Prairie, a jointly owned 132 MW, $222 million gas-fired plant, entered commercial service October 1, 2014, after the quarter. On that date, subsidiaries issued $160 million of 30-year first-mortgage bonds at coupons of 4.43% and 4.53% to provide permanent financing; proceeds also funded redemption of $12 million of higher-coupon bonds.
- Rate cases and regulatory decisions remained pending, including a Black Hills Power rate request and Colorado Electric proceedings. The filing also describes approved Wyoming rate increases and a Kansas settlement awaiting further approval.
- The Oil Creek fire litigation involves claims totaling approximately $50 million. The company recorded a liability for its estimate of probable settlement and litigation costs and a receivable for costs it believes are probably recoverable through insurance. Additional losses are reasonably possible but not reasonably estimable; management did not expect the matter to materially adversely affect consolidated results, financial condition, or cash flows.
- The proposed EPA Clean Power Plan could affect fossil-fuel generation and the coal mine; the company said its impact could not yet be predicted. Other risks include commodity prices, variable interest rates, seasonality, utility regulation, and recovery of environmental compliance costs.
- Black Hills Wyoming sold its 40 MW CTII unit for approximately $22 million and will recognize a $4.9 million deferred gain over 20 years under related agreements. The company also announced an agreement to acquire a Wyoming gas utility and pipeline assets for $17 million after quarter-end.
Key facts for investors to verify
- Reconcile reported earnings trends for the impact of the prior-year swap mark-to-market gain and the 2013 refinancing.
- Review the $275 million term loan’s refinancing or repayment plan ahead of its June 2015 maturity, alongside revolving-facility availability and covenant headroom.
- Track execution and recovery of costs for Cheyenne Prairie, planned capital spending, and outstanding rate proceedings.
- Monitor the Oil Creek claims, insurance recoveries, and any change to the recorded contingency or management’s assessment.
- Assess sensitivity to weather, commodity prices, environmental rules, and the weaker Oil and Gas segment results.