Business Context and Reporting Period
Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: A diversified energy company operating in the United States with two primary business groups: Utilities (electric and gas service in South Dakota, Wyoming, and Montana) and Non-regulated Energy (oil and gas production, power generation, coal mining, and energy marketing).
Key Subsequent Events: On July 11, 2008, the Company sold seven Independent Power Producer (IPP) plants for approximately $840 million. On July 14, 2008, the Company completed the acquisition of Aquila's regulated utility assets for $940 million.
Key Financial Metrics (Six Months Ended June 30, 2008)
| Metric | 2008 (in thousands) | 2007 (in thousands) |
|---|---|---|
| Operating Revenues | $306,123 | $291,023 |
| Net Income | $38,988 | $57,551 |
| Income from Continuing Operations | $24,890 | $47,151 |
| Income from Discontinued Operations | $14,098 | $10,400 |
| Diluted EPS (Total) | $1.01 | $1.56 |
| Operating Cash Flow | $41,260 | $85,145 |
| Cash and Cash Equivalents (End of Period) | $36,912 | $35,685 |
| Total Debt (Short-term + Long-term) | $786,371 | $519,213 |
Note: Total Debt calculated as Notes Payable ($283,000) + Current Maturities ($2,070) + Long-term Debt ($501,301) for 2008.
Material Changes vs. Prior Period
- Decline in Continuing Operations: Income from continuing operations decreased $22.3 million (47%) year-over-year, primarily driven by a $20.9 million decrease in Energy Marketing earnings and a $4.9 million increase in unallocated corporate costs related to the Aquila acquisition.
- Revenue Growth: Operating revenues increased 5.2% to $306.1 million, driven by higher utility rates and increased wholesale off-system sales, partially offset by lower non-regulated energy revenues.
- Discontinued Operations: Income from discontinued operations increased to $14.1 million (from $10.4 million) due to the cessation of depreciation and amortization on IPP assets designated for sale in the second quarter.
- Segment Performance:
- Utilities: Earnings increased due to rate hikes and higher usage, offset by plant outages and increased fuel costs.
- Oil & Gas: Earnings increased despite lower production volumes, driven by significantly higher hedged oil and gas prices.
- Energy Marketing: Earnings declined sharply due to compressed natural gas basis spreads and lower realized margins.
Guidance, Outlook, and Risks
- Capital Expenditures: Total capital expenditures for 2008 are expected to approximate $345.3 million (excluding the Aquila acquisition), including $76.2 million for the Wygen III power plant and $65.0 million for oil and gas development.
- Financing Plans: The Company plans a senior unsecured long-term debt offering of $450 million or more in the fourth quarter of 2008 to repay the $383 million acquisition facility borrowing and reduce revolving credit facility borrowings.
- Dividends: Quarterly dividend declared at $0.35 per share (annualized $1.40).
- Risks and Contingencies:
- Regulatory: Reliance on cost recovery through regulatory proceedings for utility operations.
- Market Risk: Exposure to volatility in energy commodity prices, interest rates, and credit markets.
- Legal: Ongoing arbitration regarding Earn-Out Consideration for the former Indeck stockholders; potential additional payments limited to the $35 million cap.
- Operational: Scheduled and unscheduled outages at coal-fired plants (Ben French, Osage, Neil Simpson I) impacted margins in the first half of 2008.
Investor Verification Checklist
- IPP Asset Sale Closing: Verify the final net proceeds from the July 11, 2008 sale of seven IPP plants and the associated tax implications (estimated $50M-$75M immediate tax payment).
- Aquila Acquisition Integration: Monitor the integration costs and the impact of the $940 million acquisition on future leverage ratios and credit covenants.
- Debt Refinancing: Confirm the execution and terms of the planned Q4 2008 long-term debt offering intended to replace short-term acquisition financing.
- Energy Marketing Margins: Assess the sustainability of natural gas marketing margins given the compressed basis spreads mentioned in the filing.
- Plant Availability: Track the operational performance and maintenance schedules of the coal-fired fleet to ensure no further margin erosion from outages.