Business Context and Reporting Period
Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: A diversified energy company operating in the United States with two major business groups: Retail Services (electric and gas utilities) and Wholesale Energy (oil and gas production, power generation, coal mining, and energy marketing).
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2007 | Q1 2006 |
|---|---|---|
| Operating Revenues | $186,533 | $171,890 |
| Operating Income | $55,955 | $39,369 |
| Income from Continuing Operations | $32,500 | $18,561 |
| Net Income | $32,453 | $26,151 |
| Diluted EPS (Continuing Ops) | $0.91 | $0.55 |
| Net Cash Provided by Operating Activities | $92,715 | $73,397 |
| Cash and Cash Equivalents (End of Period) | $77,836 | $42,150 |
| Long-Term Debt (Net of Current) | $602,870 | $665,373 |
| Total Debt Leverage Ratio | 40.3% | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 9% ($14.6 million) driven by higher energy marketing margins, rate increases at Black Hills Power, and improved power generation revenues.
- Profitability: Income from continuing operations increased 75% ($13.9 million). Key drivers included a $6.4 million increase in Energy Marketing earnings and a $2.9 million increase in Power Generation earnings.
- Segment Performance:
- Electric Utility: Earnings up $1.8 million due to rate increases and colder weather.
- Power Generation: Earnings up $2.9 million due to improved plant availability (96.1% vs 85.7%) following maintenance outages in 2006.
- Oil and Gas: Earnings decreased $1.8 million due to lower production volumes and higher operating costs, despite higher hedged prices.
- Discontinued Operations: Q1 2006 included a $7.6 million gain from the sale of crude oil marketing assets; Q1 2007 reflects a minor loss of $0.047 million related to settlement costs.
Outlook, Risks, and Unusual Items
- Major Acquisition: Entered a definitive agreement to acquire Aquila's regulated electric and gas utility assets for $940 million. A $1.0 billion acquisition credit facility was secured in May 2007 to fund the transaction.
- Capital Markets: Completed a private placement of 4.17 million shares at $36.00 per share in February 2007, raising ~$145.6 million used to repay revolving credit facility debt.
- Legal Proceedings:
- Earn-Out Litigation: Ongoing litigation with former Indeck stockholders; court dismissed some claims but others remain pending.
- Arbitration: Nevada Power filed a demand for arbitration regarding fuel supply and performance obligations at the Las Vegas I facility. Management does not expect a material adverse impact.
- Accounting Changes: Adopted FIN 48 (Accounting for Uncertainty in Income Taxes) on Jan 1, 2007, resulting in a $0.7 million benefit to retained earnings.
- Forward-Looking Risks: Risks include regulatory approvals for the Aquila acquisition, commodity price volatility, drilling permit delays, and the ability to recover costs through rate proceedings.
Investor Verification Checklist
- Acquisition Status: Verify regulatory approvals and closing conditions for the $940 million Aquila asset acquisition.
- Debt Covenants: Confirm compliance with leverage ratios (recourse leverage ratio limit temporarily increased to 0.70:1.00 for the first year post-Aquila acquisition).
- Oil & Gas Production: Monitor drilling permit issuance and production volumes in the Denver-Julesburg Basin, which were cited as constraints in Q1.
- Legal Exposure: Track the outcome of the Indeck earn-out litigation and the Nevada Power arbitration regarding potential damages or goodwill adjustments.
- Capital Expenditures: Review progress on the Wygen II power plant construction and the new 149 MW gas turbine facility in New Mexico.