Business Context and Reporting Period
Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
Business Overview: A diversified energy holding company operating in the United States through two primary groups: Wholesale Energy (Power Generation, Oil & Gas, Coal Mining, Energy Marketing) and Retail Services (Electric Utility, Electric & Gas Utility). The company completed the acquisition of Cheyenne Light, Fuel & Power (CLF&P) in January 2005 and sold its Communications segment (Black Hills FiberSystems) in June 2005.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2005 |
Three Months Ended Sep 30, 2004 |
Nine Months Ended Sep 30, 2005 |
Nine Months Ended Sep 30, 2004 |
|---|---|---|---|---|
| Operating Revenues | $373,011 | $270,159 | $978,473 | $804,968 |
| Net (Loss) Income | $(23,903) | $17,180 | $6,807 | $38,481 |
| Net Income Available to Common | $(23,903) | $17,102 | $6,648 | $38,237 |
| Diluted EPS (Total) | $(0.73) | $0.52 | $0.20 | $1.17 |
| Cash Flow from Operations | N/A | N/A | $128,958 | $78,618 |
| Cash and Equivalents (End of Period) | $52,970 | $79,939 | $52,970 | $79,939 |
| Total Debt (Current + Long-Term) | $684,460 | $N/A | $684,460 | $N/A |
Note: Total Debt calculated as Current maturities of long-term debt ($11,690) + Notes payable ($42,000) + Long-term debt ($672,770) as of Sep 30, 2005.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 38% ($102.9M) for the quarter and 22% ($173.5M) for the nine months compared to the prior year. Growth was driven by the CLF&P acquisition, higher oil and gas prices, and increased production volumes.
- Profitability Decline: Net income from continuing operations turned to a loss of $23.65M for the quarter (vs. $18.6M profit in 2004) and dropped to $9.1M for the nine months (vs. $40.1M in 2004).
- Impairment Charges: A significant non-cash impairment charge of $50.3M was recorded for the Las Vegas I gas-fired power plant due to uneconomic operating conditions caused by high natural gas price forecasts.
- Project Write-offs: The company expensed $8.9M (quarter) and $9.5M (nine months) in capitalized project development costs for energy projects deemed less likely to advance.
- Discontinued Operations: The sale of the Communications segment resulted in a net loss of $2.3M for the nine months ended Sep 30, 2005, primarily due to a loss on disposal.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Capital Expenditures: Expected to approximate $200 million for the full year 2005, excluding debt assumed in the CLF&P acquisition.
- Rate Increases: The Wyoming Public Service Commission approved a rate increase for the CLF&P utility effective January 1, 2006, resulting in an estimated annual revenue increase of $4.8 million.
- Construction: Construction has commenced on the Wygen II coal-fired power plant (90 MW), with commercial operations expected in early 2008.
Risks and Contingencies
- Legal Proceedings: Accrued a $2.5M pre-tax charge for a tentative settlement regarding the In re Natural Gas Commodity Litigation class action lawsuit involving Enserco Energy, Inc.
- Regulatory Risk: Utilities cannot raise retail rates without prior approval from state commissions (SDPUC, WPSC). Delays or disallowances could adversely affect revenues.
- Market Risk: Significant exposure to commodity price volatility (natural gas, crude oil) and interest rates. The company utilizes derivatives to hedge, but accounting rules (SFAS 133) may cause earnings volatility due to mark-to-market requirements on derivatives without corresponding mark-to-market on inventory.
- Liquidity: The company maintains a $400M revolving credit facility with $293.9M remaining capacity as of September 30, 2005. It is in compliance with all financial covenants.
Investor Verification Checklist
- Impairment Sensitivity: Verify the assumptions used in the $50.3M Las Vegas I impairment calculation, specifically the discount rate and long-term natural gas price forecasts.
- Derivative Valuation: Review the reconciliation of GAAP fair value to non-GAAP forward book value for natural gas marketing to understand the impact of the "Liquidity Reserve" and unmarked inventory positions.
- CLF&P Integration: Monitor the integration progress of the Cheyenne Light, Fuel & Power acquisition and the realization of expected synergies.
- Legal Settlement Finality: Confirm the finalization of the $2.5M natural gas litigation settlement and any potential for additional costs.
- Capital Allocation: Track actual capital expenditures against the $200M guidance, particularly regarding the Wygen II project and potential new acquisitions.