Business Context and Reporting Period
Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: A diversified energy company operating in the United States with two major business groups: Utilities (Electric and Gas) and Non-regulated Energy (Oil and Gas, Power Generation, Coal Mining, and Energy Marketing). The company completed the acquisition of Aquila's regulated utilities in July 2008, which are fully consolidated in this period.
Key Financial Metrics (Nine Months Ended Sept 30, 2009)
| Metric | 2009 (in thousands) | 2008 (in thousands) |
|---|---|---|
| Operating Revenues | $921,090 | $598,015 |
| Net Income (Loss) | $48,792 | $204,028 |
| Income from Continuing Operations | $46,353 | $44,542 |
| Income from Discontinued Operations | $2,439 | $159,486 |
| Diluted EPS (Total) | $1.26 | $5.31 |
| Operating Cash Flow | $270,927 | $80,085 |
| Capital Expenditures | $(245,114) | $(219,350) |
| Total Debt (Current + Long-term) | $1,069,715 | $1,205,052 |
| Cash and Cash Equivalents | $137,681 | $152,457 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 54% to $921.1 million, primarily due to the inclusion of a full nine months of results from the Aquila utility acquisition (July 2008).
- Net Income Decline: Net income dropped significantly to $48.8 million from $204.0 million. This decrease is largely attributable to the absence of the $139.7 million gain on the sale of Independent Power Producer (IPP) plants recorded in discontinued operations in 2008.
- Continuing Operations: Income from continuing operations increased slightly by 4% ($1.8 million) to $46.4 million. This was driven by a $16.9 million after-tax gain on the sale of a 23.5% interest in the Wygen I power plant and a $24.6 million after-tax unrealized gain on interest rate swaps. These gains were offset by a $27.8 million after-tax impairment charge on oil and gas assets due to lower commodity prices.
- Segment Performance:
- Oil and Gas: Reported a loss of $25.7 million (vs. $11.3 million income in 2008) due to lower prices and the impairment charge.
- Gas Utilities: Income increased to $14.2 million (vs. a loss of $1.9 million in 2008) due to a full quarter of seasonal operations compared to the partial quarter in 2008.
- Power Generation: Income increased to $18.5 million (vs. $1.8 million in 2008) primarily due to the Wygen I sale gain.
Guidance, Outlook, and Risks
- Capital Expenditures: The company expects total capital expenditures for 2009 to approximate $340.7 million. Planned expenditures for 2010 and 2011 are forecasted at $481.3 million and $554.8 million, respectively, heavily weighted toward utility generation and transmission projects (Wygen III and Colorado Electric facilities).
- Dividends: A quarterly dividend of $0.355 per share was declared on October 29, 2009. The company maintains a dividend policy dependent on financial condition and credit facility covenants.
- Debt and Liquidity: The company repaid its $383 million Acquisition Facility in the second quarter of 2009 using proceeds from asset sales and a new $250 million public debt offering. As of September 30, 2009, the company had $136.8 million of available capacity on its $525 million Corporate Credit Facility.
- Key Risks:
- Commodity Prices: Continued volatility in oil and natural gas prices impacts the Oil and Gas segment and Energy Marketing margins. The company faces potential future impairment charges if prices remain low.
- Regulatory/Environmental: Potential federal and state legislation regarding greenhouse gas (GHG) emissions and renewable portfolio standards could increase generation costs and require significant capital investment.
- Interest Rate Swaps: The company holds $250 million in interest rate swaps not designated as hedges. Mark-to-market adjustments on these swaps caused a $37.8 million gain in the first nine months of 2009 but could result in significant losses if rates move adversely.
Investor Verification Checklist
- Impairment Charges: Verify the sensitivity of the Oil and Gas segment's asset base to future commodity price fluctuations and the potential for additional ceiling test impairments.
- Interest Rate Swap Exposure: Review the fair value and maturity of the $250 million non-hedge interest rate swaps and the potential impact of rate changes on future earnings volatility.
- Capital Project Funding: Assess the company's ability to fund the projected $481 million in 2010 capital expenditures, particularly the Wygen III and Colorado Electric projects, given current credit market conditions.
- Regulatory Rate Cases: Monitor the status of pending rate cases for Black Hills Power (South Dakota and Wyoming) filed in late 2009, which seek significant revenue increases to recover construction costs.
- Discontinued Operations: Confirm that the 2008 earnings comparison is adjusted for the one-time gain on the IPP sale to accurately assess ongoing operational performance.