Business Context and Reporting Period
Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2006
Business Overview: A diversified energy company operating in the United States with two primary business groups: Retail Services (electric and gas utilities) and Wholesale Energy (power generation, coal mining, oil and gas production, and energy marketing). The company completed the sale of its crude oil marketing and transportation business in March 2006, which is now reported as discontinued operations.
Key Financial Metrics (Six Months Ended June 30, 2006)
| Metric | 2006 (in thousands) | 2005 (in thousands) |
|---|---|---|
| Operating Revenues | $325,704 | $284,805 |
| Operating Income | $71,799 | $66,422 |
| Income from Continuing Operations | $30,929 | $30,569 |
| Net Income | $37,908 | $30,710 |
| Diluted EPS (Total) | $1.13 | $0.93 |
| Cash from Operating Activities | $106,646 | $140,357 |
| Cash from Investing Activities | ($107,032) | ($28,106) |
| Cash from Financing Activities | $13,077 | ($116,130) |
| Total Debt (Long-term + Current) | $671,272 | $686,631 |
| Cash and Cash Equivalents | $42,234 | $54,151 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 14% ($40.9 million) year-over-year, driven by higher retail and wholesale sales, higher rates at Cheyenne Light, and increased oil and gas production revenues.
- Discontinued Operations: Net income includes a significant gain of $6.979 million from discontinued operations, primarily due to the sale of the crude oil marketing and transportation business in March 2006. Excluding this, income from continuing operations increased only slightly ($0.4 million).
- Segment Performance:
- Energy Marketing: Earnings increased significantly ($7.5 million) due to higher realized and unrealized marketing margins.
- Power Generation: Earnings decreased 55% ($5.5 million) due to scheduled and unscheduled outages at Las Vegas facilities and lower earnings from power fund investments.
- Oil and Gas: Earnings decreased 20% ($1.8 million) despite higher revenues, due to increased production expenses and depletion costs.
- Coal Mining: Earnings decreased 32% ($1.0 million) due to lower coal sales volumes and increased overburden expenses.
- Cash Flow: Operating cash flow decreased $33.7 million, largely due to changes in working capital (specifically natural gas inventory levels) and net changes in derivative assets/liabilities.
Guidance, Outlook, and Risks
- Capital Expenditures: The company expects full-year 2006 capital expenditures to approximate $302.2 million, including construction of the Wygen II plant and oil and gas acquisitions.
- Rate Increase: The electric utility filed an application with the South Dakota Public Utilities Commission for a 9.5% rate increase effective January 1, 2007, expected to generate approximately $9.5 million in annual revenue.
- Acquisitions: The company signed agreements to acquire additional oil and gas interests in the Piceance Basin for approximately $24.1 million, expected to close in Q3 2006.
- Liquidity: The company maintains a $400 million revolving credit facility with $244.8 million available as of June 30, 2006. Credit ratings are Baa3 (Moody's) and BBB- (S&P).
- Risks: Key risks include regulatory cost recovery, commodity price volatility, plant outages, and the ability to secure financing for future projects. The company notes that forward-looking statements are subject to uncertainties regarding weather, energy prices, and litigation outcomes.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by analyzing results excluding the one-time gain from the sale of the crude oil marketing business.
- Power Generation Outages: Monitor the operational status of the Las Vegas I and II facilities and the impact of outages on future revenue and maintenance costs.
- Regulatory Approval: Track the status of the 9.5% rate increase application filed with the South Dakota Public Utilities Commission.
- Commodity Hedging: Review the exposure to natural gas and crude oil price fluctuations, noting the volatility in earnings from energy marketing due to mark-to-market accounting.
- Capital Allocation: Assess the company's ability to fund the projected $302.2 million in capital expenditures through operating cash flow and debt markets.