Business Context and Reporting Period
Company: Black Hills Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Black Hills Corporation is a diversified energy company operating in two primary groups: Utilities (regulated electric and gas distribution) and Non-regulated Energy (oil and gas exploration, power generation, coal mining, and energy marketing). The company serves customers primarily in the Rocky Mountain and Western regions of the United States.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Total Operating Revenues | $695.9 million | $656.9 million |
| Net Income Available for Common Stock | $98.8 million | $81.0 million |
| Diluted Earnings Per Share (EPS) | $2.64 | $2.42 |
| Income from Continuing Operations | $100.1 million | $74.0 million |
| Operating Cash Flow (Continuing Ops) | $256.6 million | $262.3 million |
| Total Assets | $2,472.9 million | $2,244.7 million |
| Long-Term Debt (Net of Current) | $564.4 million | $628.3 million |
| Stockholders' Equity | $969.9 million | $790.0 million |
| Capital Expenditures | $267.0 million | $308.5 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 6% ($39.0 million) driven by higher volumes and prices across most segments, offset by lower pass-through costs at the electric and gas utility.
- Profitability: Net income increased 22% ($17.8 million). Income from continuing operations rose 35% ($26.1 million), primarily due to a 31% increase in utility earnings and a 34% increase in non-regulated energy earnings.
- Segment Performance:
- Utilities: Earnings increased $7.4 million, driven by a 7.8% retail rate increase in South Dakota effective Jan 1, 2007, and AFUDC income from the Wygen II plant construction.
- Energy Marketing: Earnings surged $16.9 million due to favorable natural gas market conditions and a $30.7 million increase in realized gas marketing margins.
- Power Generation: Earnings improved $1.5 million as Las Vegas plants returned to normal operations following 2006 outages, partially offset by impairment charges ($3.3 million) at the Ontario plant and partnership investments.
- Oil and Gas: Earnings remained flat despite a 7% revenue increase, as higher operating costs and depletion expenses offset price gains.
- Balance Sheet: Long-term debt decreased 10% due to debt repayments funded by a $150.8 million common stock issuance. Stockholders' equity increased 23%.
Guidance, Outlook, and Risks
Strategic Initiatives and Outlook
- Aquila Acquisition: The company is pursuing a $940 million acquisition of Aquila's utility assets (Colorado electric; Colorado, Kansas, Nebraska, Iowa gas). As of the filing date, regulatory approvals were obtained in Iowa, Nebraska, and Colorado, with Kansas pending. The deal is expected to close in Q2 2008 and add ~612,000 customers.
- Capital Projects: The 95 MW Wygen II coal-fired plant commenced commercial service Jan 1, 2008. Construction on the 100 MW Wygen III plant is expected to begin in spring 2008 pending final regulatory approval. The 149 MW Valencia gas plant is scheduled for commercial operation in summer 2008.
- Asset Review: Management is evaluating the strategic merits of certain non-regulated power generation assets, with a decision on potential divestitures expected in Q2 2008.
- Dividends: The Board declared a quarterly dividend of $0.35 per share, marking the 38th consecutive annual increase.
Risks and Contingencies
- Regulatory Risk: Completion of the Aquila acquisition is contingent on remaining regulatory approvals (Kansas, Missouri) and antitrust clearance. Delays could impact financing costs.
- Environmental Compliance: The company faces potential costs from evolving environmental regulations, including the Clean Air Mercury Rule (overturned but under review) and potential greenhouse gas mandates. Solid waste disposal practices at coal mines are under state review.
- FERC Investigation: The company identified potential noncompliance with FERC regulatory requirements in natural gas marketing activities and has notified the staff. A reserve has been established for potential penalties, which could impact net income in a specific period.
- Commodity Volatility: Earnings in non-regulated segments are exposed to fluctuations in oil, gas, and power prices. The company utilizes hedging strategies to mitigate these risks.
Investor Verification Checklist
- Aquila Acquisition Status: Verify the final regulatory approval status in Kansas and Missouri and the expected closing date in Q2 2008.
- FERC Penalty Exposure: Monitor updates on the FERC compliance investigation to assess the final penalty amount and its impact on future earnings.
- Power Plant Divestitures: Track the Q2 2008 decision regarding the sale of non-regulated power generation assets and the potential proceeds.
- Wygen III Permitting: Confirm the receipt of the Certificate of Public Convenience and Necessity from Wyoming to ensure construction proceeds as planned.
- Oil and Gas Reserve Revisions: Review future reserve reports for material changes in proved reserves, which impact depletion rates and the "ceiling test" for capitalized costs.